RBI should not let rupee volatility sway rate cut decision

Moneycontrol Bureau

Brokerage house Kotak Securities feels the Reserve Bank of India (RBI) should not let the recent weakness in the rupee influence its decision on interest rates.

Market expectations of a cut in the benchmark repo rate at RBI's June 17 meet has receded with the rupee hovering around its record low. The widely held view is that the RBI may not lower the policy rate, as it would further weaken rupee and accelerate foreign fund outflows from government bonds.

Already, FIIs have net sold over Rs 15,000 crore of government bonds in the last three weeks.

"We maintain our call of a 25 bps repo rate cut on June 17 even after the sudden Rupee depreciation pressure has in itself eased monetary conditions. We believe the depreciation pressure was mainly due to global pressures and that the USD/INR(rupee) is likely to stabilize in the current zone in the near term," said the Kotak note to clients.

"Domestic conditions have hardly changed with (1) growth-inflation dynamics continuing to be biased for a rate cut, (2) fiscal pressures remaining manageable and (3) expected containment in gold demand with recent regulatory changes. Importantly, we think the RBI might not immediately want to signal a pause in the monetary easing cycle as a sudden stoppage can have adverse implications for domestic money-market rates and push back chances of growth recovery," the note said.