Turkey crisis, falling rupee complicate RBI’s job despite a dip in inflation
2 min read.Updated: 14 Aug 2018, 09:12 AM ISTBloomberg
A weak rupee complicates the Reserve Bank of India's job of keeping prices in check. The RBI aims to keep inflation at the 4 percent midpoint of its target band in the medium term.
There’s not a moment of respite for inflation-targeting Reserve Bank of India. Just when gains in consumer prices eased, a renewed onslaught on the rupee amid a Turkish lira-led rout on emerging market currencies may require a response, and possibly more rate action. Government data on Monday showed retail inflation quickened 4.17 percent in July from a year earlier, slower than the 4.5 percent median estimate in a Bloomberg survey of economists. The same day the rupee hit a record low of 69.9337 against the dollar, keeping its position as Asia’s worst-performing currency this year intact.
A weaker currency complicates the Reserve Bank of India’s job of keeping prices in check. The monetary policy committee led by Governor Urjit Patel increased interest rates twice since June to curb rising price pressures, while the RBI depleted $23 billion in foreign reserves to check currency volatility. The central bank doesn’t target the exchange rate and attributes any rate moves to its goal of containing rising prices.
“The weak rupee is indeed making life difficult for Patel and his fellow members of the monetary policy committee," said Hugo Erken, a senior economist at Rabobank International in the Netherlands. “The RBI tightening cycle will put an end to the current free fall."
Domestic stocks, the currency and bonds fell as the turmoil in Turkey sparked worries of a potential market contagion and damped investors’ appetite for emerging market assets. The yield on the 10-year bond rose 7 basis points to 7.82 percent on Monday.
Global risks, such as high oil prices and trade tensions, are weighing on the growth outlook, the International Monetary Fund said in its recent report on India that likened the economy to an elephant that’s started to run. Despite the headwinds, the latest high-frequency indicators like the purchasing managers’ surveys show that India’s start to the July quarter has been strong.
“The RBI may pause its rate hiking cycle for now after two back-to-back rate hikes, as the economy is temporarily in a goldilocks phase with moderating inflation and improving activity indicators," said Teresa John, an economist at Nirmal Bang Equities Pvt in Mumbai. She expects another rate hike in the early part of the next financial year, given that inflation is likely to stay above the RBI’s projections.
The central bank aims to keep inflation at the 4 percent midpoint of its target band in the medium term and raised the forecast for the six months to March 31 to 4.8 percent from 4.7 percent.