Moneycontrol Pro Panorama | The case for a 50-bps rate hike

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The Reserve Bank of India’s monetary policy committee will meet later this week at a time of great global turmoil and uncertainty. A 50 basis points rate hike seems to be the most likely outcome of the meeting.

Inflation is around 7 percent and is not going to come down in a hurry. The August headline inflation reading was 7 percent and this was in large part owing to food inflation which came in at 7.62 percent. With RBI’s own projections showing third and fourth quarter inflation this financial year at 6.4 percent and 5.8 percent respectively, a rate hike is a given.

Then, of course, there is the matter of major central banks raising rates sharply. The US Federal Reserve’s dot plot now shows the terminal fed funds rate at 4.75 percent in March 2023. This has led to a strengthening of the US dollar against major currencies including the rupee. The local currency had slipped further in Monday’s trading to a new low against the US greenback. A low differential between interest rates of India and developed markets means that local assets will be relatively unattractive for foreign investors. This in itself would be another reason for the MPC to hike rates by at least 50 bps, with some  saying even a 60 bps rate would be a good idea.

The RBI has been defending the rupee to smoothen its fall, but at the cost of forex reserves. India’s foreign exchange reserves have fallen to $551 billion for the week ending September 9 and provide import cover for only 8.4 months, a Morgan Stanley report said.

RBI’s aggressive intervention has also led to a drying up of liquidity, which adds a further dimension to the MPC’s considerations. How can the RBI juggle between its domestic monetary policy and exchange rate management policy? Read our detailed analysis here.

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Technical Picks: GoColors, Nifty Futures, USD-INR, Lead Futures and SBI (These are published every trading day before markets open and can be read on the app).

Ravi KrishnanMoneycontrol Pro