The rupee is trading at the level of 96 against the dollar. To save this, RBI is taking various measures. Recently there was news that to boost the rupee, RBI may increase interest rates in the June policy meeting. But now this idea has been completely rejected.
The Reuters report quoted three sources as saying that the country’s banking regulator Reserve Bank of India does not consider increasing interest rates to be the best way to save the troubled rupee. This stance is different from what the markets think, and reinforces the point that the policy decision on borrowing cost will be based on inflation and not currency.
According to sources familiar with RBI’s thinking, the Reserve Bank of India still has some methods which it has not used yet. Reuters had earlier reported that these methods include options like dollar deposit schemes for NRIs (Non-Resident Indians) and tax changes for debt investors. A source said that all options are still open and are being considered in coordination with the government. The source said that it does not seem that there is any need for the Central Bank to increase interest rates immediately.
Rupee will not benefit from this
Because of this stance, policy makers deviate from the market’s expectations of strictness. This is happening when the rupee has fallen to a record low due to a sudden surge in energy prices linked to the Iran conflict. However, inflation is still under control, and officials fear that raising interest rates will not do much to stabilize the currency.
Rather, this will increase the risk of further damage to the already slowing economic growth rate in Asia’s third largest economy. As the risk of inflation and currency decline increases, Indonesia and the Philippines have increased their interest rates. India’s rupee has fallen nearly 6 percent since the start of the Iran war in late February, falling to a record low of 96.96 per dollar on Thursday.
Has RBI taken this step?
Interest rate swap markets are predicting that RBI may increase interest rates by at least 40 basis points in the next three months and by more than 100 basis points in the next one year. Another source warned that a huge increase in interest rates would be needed to keep the currency strong. He said that small changes will not have any significant impact, but it may further reduce demand.
The RBI has historically avoided using interest rates as the main weapon to support the rupee, except for a small increase in the ‘Marginal Standing Facility’ (MSF) rate in 2013. A fourth source said officials are continuing to consider measures to stabilize the currency, although not all options may be used. The first source said that the economic growth rate which RBI had estimated in April for the current financial year was 6.9 percent, now it will probably be reduced to less.
keep an eye on inflation
A sudden rise in oil prices and a weakening rupee may again increase inflationary pressure in India’s oil-import dependent economy. Due to this, the Central Bank’s estimate of 4.6 for this year in April may also be exceeded. Another source said that inflation based on Consumer Price Index (CPI) is now moving towards 5 percent or a little more.
This is still within the RBI’s prescribed range of 2-6 percent, although it is higher than the target of 4 percent. In April, CPI inflation rate was 3.48 percent. Last month, wholesale inflation in India increased to 8.3 percent, but compared to the CPI basket, oil has a higher share in it. Also, due to limited pass-through in prices, its impact on consumers has been reduced to some extent.
There will be no change in June
All three sources said policymakers are waiting to see how quickly these pressures affect core and headline consumer prices. The committee that decides the rates of the Central Bank will give its next decision on June 5. The committee discussed this topic with economists on Thursday. Two people involved in the discussion, speaking on condition of anonymity, said that, although Governor Sanjay Malhotra did not give any direct indication, he did ask the question whether it would be right to increase the prices in advance, given the time taken for the policy changes to take effect? Most economists do not expect a rate hike in June, but some institutions like Standard Chartered are predicting a tightening (increase) in rates.
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