Mumbai: India’s central bank may raise interest rates if the rupee falls past 43 per dollar as imported inflation would rise much above the its comfort level, broking firm UBS Securities Asia-Pacific said in a note on Thursday.
The country imports a majority of its oil and record oil prices means that the country has to pay more in dollars and a weaker currency only pushes up import costs further.
“Higher official rates can still be justified on the basis that M3 growth remains too high and way above the official 17-18% projection, inflation remains policy problem number one and the real economy (from a GDP perspective) remains remarkably robust so there is scope to tighten,” Philip Wyatt, economist at the Swiss firm wrote in a note.
The Indian rupee has lost more than 8% in 2008 weighed by higher dollar demand from oil importers and concerns the near 24% drop in the benchmark stock index may trigger outflows from foreign portfolio investors.
Wyatt expects inflation to hit 9-9.5% in the short term and expects a further rise of 3 percentage points from current levels in three years due to the fuel price hike.
India announced its biggest increase in petrol and diesel prices in 12 years on Wednesday to curb losses at its state-owned refiners, a move which will increase inflation and has triggered a political backlash.
UBS expects fiscal deficit in 2008/09 at 8% of GDP compared with 6.7% in 2007/08 and says money market rates have to rise to control inflation.