India’s central bank may hike rates to defend its currency
People walk past the Reserve Bank of India sign in front of the installation booth at the Global Fintech Fest on August 28, 2024 in Mumbai, India.
Indranil Aditya | Nurfoto | Getty Images
India’s central bank may defy expectations that it will leave its benchmark interest rate unchanged at its monetary policy meeting on Friday.
While the majority of economists participating in the CNBC survey expected the Reserve Bank of India to keep interest rates unchanged at 5.25%, they signaled that the interest rate increase could only occur towards the end of the year.
The minority expects policymakers to take action at this week’s meeting to stabilize the rupee, which has lost record value against the dollar.
CNBC conducted a survey of nine economists last week ahead of the RBI policy decision.
But speaking to CNBC’s Inside India on Tuesday, Venugopal Garre, Bernstein’s managing director and head of India research, said it would “make more sense” for India’s central bank to chart a different course and raise interest rates.
He added that the rate hike would bring India in line with “how global interest rates have been moving in recent weeks” and could contain outflows at a time when “currency depreciation is the biggest pain point for policymakers.”
India’s peers in the region have taken action – some going beyond expectations – to get ahead of the inflation curve.
like india Indonesia It has been struggling with a falling currency, and on May 20 the country’s central bank raised policy interest rates by 50 basis points, more than expected. Central bank of Sri Lanka On May 26, it increased the policy rate by 100 basis points, the biggest increase in the last four years.
India’s currency is under pressure due to a rising import bill and persistent capital outflows, even prompting Prime Minister Narendra Modi to appeal to citizens to help preserve the currency.
Policymakers take action, including selling dollars, to defend the struggling rupee through state banks To halt its decline, according to a Reuters report. The government has also increased duties to limit demand for gold, a move aimed at preserving the currency.
The rupee remains among Asia’s most fragile currencies, despite climbing to record lows and approaching the psychologically important level of 100 against the dollar.
US Dollar/Indian Rupee Spot Rate
Referring to exchange rate volatility, RBI Governor said, Sanjay Malhotra In an interview on news site Mint on May 25, he said the central bank would do “whatever it takes to ensure orderly price discovery in the forex market.”
Although Malhotra did not explicitly say that a rate hike was being considered, his words showed that he was preparing foreign exchange and bond markets for bolder action, with all options on the table.
Inflation concerns
Another factor that could push the RBI in favor of a rate cut is the risk of high inflation.
Although India’s inflation rate remains below the RBI-mandated 4%, some economists believe that inflationary pressures from high energy costs, a weak currency and weather-related product shortages could force the RBI to take preemptive action.
Chief Economist Sakshi Gupta said there are new risks to the upcoming inflation trajectory due to “the pass-through of higher energy costs to retail consumers” and “weather-related disruptions from El Niño this year.” HDFC Bank.
In April, India’s consumer price inflation rose to 3.48% for the sixth consecutive month despite the government keeping pump prices steady.
However, over the past two weeks the government has implemented several fuel price increases that could lead to a sharper rise in inflation.
Cumulative fuel price increases of 7.5 rupees ($0.08) per liter exceeded Citi’s underlying assumptions of 5 rupees, prompting the brokerage to raise its average inflation forecast for the fiscal year ending March 2027 to 4.9% from 4.6% previously.
“We still expect the June MPC to keep interest rates steady,” the brokerage said in its report on Saturday, referring to the central bank’s Monetary Policy Committee, but added that it expected two increases of 25 basis points each in August and October.
Fuel, fertilizer, food
Negative El Niño forecasts may force the RBI to raise inflation forecasts and raise interest rates as soon as possible. El Niño refers to a warming of sea surface temperatures that occurs naturally every few years. The Reserve Bank of India warned in its meeting in April that El Niño could be a threat to inflation.
These predictions now look sharper.
“El Niño will arrive on our doorstep with 90% certainty in the coming months,” United Nations secretary-general António Guterres said on Tuesday. He added that the world should treat this as an event “urgent climate warning” he said and warned that “the effects will hit harder.”
Meteorologists have lowered expectations for this year’s Indian monsoon. Rainfall amount is expected to be 90% According to numerous local media reports, it is above the long-term average.
This is weaker than the 92% forecast released in April and marks the worst monsoon performance in the last 11 years. India is already in the grip of a severe heatwave and is almost 60 percent of farming depends on this about rainfall.
Food inflation, a key component of India’s consumer price index, rose 4.2% in April from 3.87% in March.
In addition to the difficulties in food production, Maximo Torero, Chief Economist of the UN Food and Agriculture Organization, said: India faces fertilizer shortage Ahead of the critical Kharif sowing season in India.
“If the crisis (Gulf conflicts and subnormal monsoon) continues, India will face higher import costs, reduced availability of domestic fertilizer and pressure on food inflation, especially in wheat, rice and vegetables,” he said in a report published on news agency website ANI on April 22.
