NEW DELHI:There seems to be no moment of respite for Reserve Bank of India () in its inflation-targeting agenda.
Just when gains in consumer prices eased, a renewed onslaught on the 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 quickened 4.17 per cent in July from a year earlier, slower than the 4.5 per cent median estimate in a Bloomberg survey of economists. On Tuesday, the rupee breached the 70-mark against the dollar, keeping its position as Asia’s worst-performing currency this year intact.
A weaker currency complicates the RBI’s job of keeping prices in check. The monetary policy committee led by Governor 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.”
A selloff in Turkey’s spread to other emerging market currencies, with the rupee losing the most since September 2013. Earlier this month, the RBI raised rates to the highest in two years against the backdrop of an economy that’s growing faster than any other major nation.
Local stocks, the currency and bonds fell as the turmoil in 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 per cent on Monday.
“Turkey’s troubles are unlikely to affect India much beyond a mild impact on the currency — which, in any case, mostly reflects broader dollar strength,” said Abhishek Gupta, India economist, Bloomberg Economics.
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 per cent midpoint of its target band in the medium term and raised the forecast for the six months to March 31 to 4.8 per cent from 4.7 per cent.
Get latest news & live updates on the go on your pc with . Download The for your device. in English and other languages.