NEW DELHI: India’s central bank is expected to increase its policy rate by half a point for the third time in a row as the currency’s plunge to a record low this month complicates the battle against inflation.
The Reserve Bank of India’s (RBI) six-member monetary policy committee will raise its repurchase rate by 50 basis points to 5.9%, according to 24 of 35 economists surveyed by Bloomberg as of Wednesday.
Ten forecast the rate will rise by 35 basis points to 5.75%, while one sees a quarter-point increase.
Governor Shaktikanta Das may opt to dial up his hawkish rhetoric today from his tone at the August meeting when he pledged to do “whatever it takes” to cool inflation that has stayed above 6% this year.
Since then, India’s price gains quickened anew and the currency slump deepened as the US Federal Reserve (Fed) raised rates by 75 basis points for a third consecutive time and amplified a hawkish signal while warning of a painful slowdown needed to curb US inflation.
“The biggest point of worry currently is the significant depreciation in the currency,” said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank Ltd.
Deteriorating reserves curtail RBI’s ability to intervene so “higher interest rates will have to be maintained with hawkish tone in the policy to support the rupee.”
With oil prices falling below US$80 (RM371) a barrel from more than US$120 (RM557) in June, the RBI will probably revise its oil price assumption today from the US$105 (RM487) level it factored in previously.
It’s unlikely to make any significant changes to this year’s 7.2% economic growth forecast, or 6.7% inflation outlook, given pressures from food grain prices.
“The inflation-growth mix is likely to remain tricky,” HSBC Holdings Plc economists led by Pranjul Bhandari wrote in a note this week.
They expect the RBI to hike by 50 basis points each at the September and December meetings and see average inflation staying above the 4% mid-point of the RBI’s target range in the current and next fiscal years as economic growth slows.
The rupee is down about 10% this year and trading near a record low even after the RBI mounted a staunch currency defence in the past year – evident from an almost US$100bil (RM464bil) drop in its foreign-currency reserves, with some of the decline attributed to revaluation.
Das had said the reserves “provide a cushion against external shocks.”
A broad consensus among market participants was that anything lower than a 50-basis-point hike, or the governor sounding less hawkish may push the currency even lower.
“Rupee readjustment is catching up faster than peers, as it was held artificially stronger in past adjustments by policy intervention,” Madhavi Arora, lead economist at Emkay Global Financial Services wrote in a note.
“The forex war chest has already dipped an estimated more than US$100bil (RM464.65bil), while the war is still pretty much on.” — Bloomberg