Not too many people are really talking about it but the RBI may be close to deciding on another rate hike. Whether the decision is taken by the MPC as part of its October credit policy or whether it is taken in the interim period, remains to be seen. However, if the current macros are anything to go by then the RBI may not really wait all the way till October to implement the rate hike. The rate hike may actually come much sooner. If you wonder as to why the RBI would look at a third rate hike in just 3 months then here is why.
Rupee at 71 is bad enough…
Forget about the theorists who are talking about how a weaker rupee could boost exports. Whatever happens to exports, India’s 75% dependence on imported crude is not going to change anytime soon. With Iran sanctions, the price of crude is likely to remain elevated and that means the import bill will not really come down in a hurry. The fall of the INR from 68 to 71 has been quite rapid and this fall is leading to bankers and importers rushing for forward cover. This sudden demand for dollars is only leading to a sharper rise in the value of the dollar and that is putting more pressure on the INR. At the other end, the US appears to be gaining the upper hand in the global trade war. That may again strengthen the dollar. Economists are already fearing that rupee beyond 72 could put palpable pressure on the CAD.
No worries on growth
If the positive GDP growth for the June quarter at 8.2% is any hint, then it only indicates that the RBI really has room for another rate hike. Between Jan 2015 and mid-2017, the RBI cut rates by nearly 200 basis points with an additional 75 bps through compression of rate spreads. When the note ban was announced, the banking system was suddenly flush with funds and lending rates dropped by over 100 bps as banks struggled to disburse the excess liquidity in the banking system. That only means that the RBI has sufficient room to hike rates without really impacting growth in any meaningful way.
RBI has limited options
In the last couple of months, the RBI has been spasmodically intervening to support the INR. It has sold dollars worth $25 billion leading to the forex reserves dipping below the $400 billion mark. That is not great news as it leaves the forex cover at less than 9 months of imports. That means; the ability of the RBI to intervene to sell dollars is limited. The only option now is to hike rates. That is one defence that central banks in emerging markets have. Higher rates lead to a spate of capital inflows which will automatically correct the imbalance. If the 10-year bond yields at near 8% is any indication, then a rate hike by the RBI may not really be far away. The extent of rate hike is still unclear! ©