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Rate hike sign RBI more concerned about rupee
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IANS | 05 Aug, 2022
With the Reserve Bank of India (RBI) on Friday raising the repo rate by
50 basis points to take it to pre-pandemic levels at 5.40 per cent, as
the MPC seeks to bring inflation closer to the mid-point of 4 per cent,
the SBI Ecowrap report said it indicates the central bank is concerned
about the global situation.
RBI retained CPI inflation
projection for FY23 at 6.7 per cent, and the RBI Governor mentioned that
this does not take into account the impact of monetary policy actions
taken now.
Even though the RBI may have frontloaded the rate
hikes, it remains to be seen how it influences the trajectory of rupee
over the medium term. While the rupee did witness a smart recovery after
the policy announcement, it was unable to hold onto the gains. Research
suggests that countries with low prior FX reserves are more likely to
choose an interest rate defence than countries with high reserves. This
is probability, not the case for India (FX reserves: $572 billion).
"Further,
defending the currency through interest rates could also indicate the
market participants getting into a self-fulfilling prophecy of expecting
more rate hikes to automatically protect the domestic currency whenever
it is under pressure. However, in a situation when current account
deficit is likely to cross 3.5 per cent, raising the rates might be the
best carry trade bet to finance the large CAD," the SBI Ecowrap report
said.
This rate hike indicates three possibilities: that the
last 50 bps hike did not have any material impact on the inflation
trajectory as of now and will impact inflation in the longer horizon,
that the RBI does not want to put a lower inflation forecast at this
time as it wants to remain ahead of the curve in an uncertain global
environment of currencies and inflation, and Friday's 50 bps hike is an
indication that the RBI is more concerned about rupee and external
situation, i.e. using interest rate as an defence to protect the rupee.
In
the policy statement, RBI Governor Shaktikanta Das said that the Indian
rupee has moved in a relatively orderly fashion depreciating by 4.7 per
cent against the US dollar during the same period - faring much better
than several reserve currencies as well as many of its EME and Asian
peers. The depreciation of the Indian rupee is more on account of the
appreciation of US dollar rather than weakness in macroeconomic
fundamentals of the Indian economy.
During the current financial
year (up to August 4), the US dollar index (DXY) has appreciated by 8
per cent against a basket of major currencies.
"Market
interventions by the RBI have helped in containing volatility and
ensuring orderly movement of the rupee. We remain watchful and focused
on maintaining stability of the Indian rupee," Das added.
The RBI
retained real GDP growth projection for FY23 at 7.23 per cent and CPI
inflation projection at 6.7 per cent for the similar period.
"In
India, the RBI has reiterated its commitment to bring inflation down
hinting at future rate hikes without giving the exact amount of rate
hikes. However, the word count analysis of the Governor's statement
indicates how rupee is getting featured more often along with inflation
and growth," the report said.
On the liquidity situation, the
report said that the system liquidity has been in the surplus mode this
fiscal. As liquidity in the banks squeezed, banks had to resort to MSF
borrowing between July 22 and July 28.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
|
66.20
|
64.50 |
UK Pound
|
87.50
|
84.65 |
Euro
|
78.25
|
75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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