In a volatile trade at the inter-bank forex market on Wednesday, the rupee opened below the 73-mark at 73.26 against the dollar as it moved in sync with oil prices which at one time breached the $85-per-dollar mark and settled a tad lower at $84.86 per barrel. “Since the Indian economy, like many other emerging markets, is presently in the cross-currents of global developments, the RBI is likely to be on guard keeping a strict vigil on the U.S. 10-year bond yield and crude prices”.
Against this backdrop, the RBI’s Monetary Policy Committee will announce its latest policy decision on Friday and an interest-rate increase is likely.
Garg said BAML’s economists expect the RBI to stay on hold tomorrow, but he isn’t so sure.
The Reserve Bank of India (RBI) said on Friday it has been trying to ensure the foreign exchange market remains liquid and is not targeting any particular level. The neutral monetary policy stance has now been changed to calibrated tightening. Governor Urjit Patel said this meant rate cuts in the current cycle were “off the table”, though the central bank will not necessarily hike at every meeting either.
However, a likely intervention by the country’s central bank aided the Indian rupee to recover before closing at 73.34 (73.3450) to the United States dollar.
He maintained that the value of rupee is determined by the market forces and the RBI does not have any “target or band” around any particular level of the exchange rate. “Excluding the HRA impact, CPI inflation is projected at 3.7 per cent in Q2:2018-19, 3.8-4.5 per cent in H2 and 4.8 per cent in Q1:2019-20”, it said.
On Thursday, the U.S. dollar touched 1.3828 against the Singapore dollar, its highest since Jul 11 a year ago. Bank Indonesia added 25 bps to its four previous hikes this year, bringing rates to 5.75 percent as expected, or 150 bps higher since May.
The panel’s decision comes at a hard time for Indian policy-makers.
“Other takeaway is they are not complacent that is why the stance has changed from neutral to calibrated tightening”.
Repo rate is an important benchmark based on which the term deposit rates and lending rates are fixed by banks and financial institutions.
On Thursday, the government lowered duties on fuel, providing some relief to consumers while putting pressure on its budget goals.
“FICCI welcomes RBI’s decision to keep the repo rate unchanged”. It has fallen almost 15 per cent so far in 2018, the worst performer among its other Asian peers. “Given the rising oil and trade tensions, traders will bet on exports going up, to curb further weakening in the currency”, said Anand James, Chief Market Strategist at Geojit Financial Services.
Volatility in global financial markets continues to impart uncertainty to the inflation outlook, the RBI said, identifying it as the third key risk.
India’s inflation is 3.69% as of August 2018, below the 4% target.