The rupee, which touched an all-time low of 73.41 against the dollar, may have pushed the central bank to turn hawkish.
The Reserve Bank of India (RBI) held interest rates unchanged on Friday, condemning the rupee to a record low and surprising analysts who had expected a rate rise to counter inflationary pressures arising from the weak currency and high oil prices.
A "neutral" stance allows the RBI to move either way on rates.
Retail inflation in August increased 3.69 per cent, slowing from 4.17 per cent in the previous month. And the decision it makes "will highlight the RBI's bias to the market in terms of it objective and mandate". This comes after MPC raised the benchmark repo rate twice this year, taking it from 6 percent to 6.5 percent.
The Reserve Bank of India's (RBI) pause after two hikes since June is in contrast to its peers in Indonesia and the Philippines, who have pressed ahead with aggressive policy action to counter an emerging-market selloff triggered by higher United States rates and a stronger dollar.
All of this has resulted in currency depreciations in emerging economies, which is an understatement as far as the rupee is concerned. We won't be surprised by more than a 25 basis point hike, but still, we revise our end-year forecast for USD/INR to 75 from 73.5.
Against this backdrop, the RBI'sMonetary Policy Committee will announce its latest policy decision on Friday and an interest-rate increase is likely.
Since the MPC's mandate is to target inflation, there is a possibility that we may be seeing another rate hike - the third in a row. So, they (RBI) may take a pre-emptive action.
"The key takeaway is that the MPC remains focused on inflation control". The rupee's performance is worst amongst the other Asian currencies amid the widening of current account deficit of India by a greater margin due to the surge in crude prices. Market was expecting at least 25 bps repo rate hike and measures to stabilise the rupee.
Unveiling the bi-monthly monetary policy, the central bank warned that volatile and rising oil prices and tightening of global financial conditions pose substantial risks to growth and inflation. Secondly, oil prices remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate.
So while inflation in India is rising it's being driven by external factors, rather than strength in the underlying economy. There was speculation that the RBI would increase the Repo rate to boost foreign investment inflows.
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