Stock - Indian Rupee
India's central bank took another step towards reining in inflation, with a 50 basis point hike to 4.90 per cent. Image Credit: Bloomberg

Dubai: The Indian rupee is holding steady at 21.15 to the dirham early on Wednesday (June 8) after the Reserve Bank of India raised interest rate by 0.5 per cent. This is the second hike by the central bank since May.

But currency market sources reckon the stability will be temporary. “The perception is the rupee is headed towards 22 to dirham levels, and the only question is how long will that take,” said a treasury official after the RBI announcement. “Most analysts had been expecting another 40 basis points hike like the one in May – the 50 bps move shows the RBI is taking inflation head on.”

It was on May 9 that the rupee dropped past the 21 level for the first time, and the impression at the time was that the RBI would intervene by buying up dollars in the open market and firming up the rupee to under 21. That didn’t happen, and the rupee has been stuck in the 21 and over range since, setting off some heavy remittance volumes.

All eyes on inflation

On Wednesday, the RBI said that inflation is projected at 6.7 per cent for financial year 2022-23 against the earlier projection of 5.7 per cent, while GDP growth forecast is retained at 7.2 per cent. The Sensex is slipping after the rate hike, dropping more than 300 points (by 0.54 per cent).

"A hike was inevitable - but we are now entering the red zone," said Anuj Puri, Chairman of the real estate consultancy Anarock. "Any future hikes will reflect markedly on housing sales. The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month.

"Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12 per cent and above. Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments."

Wait until mid-June?

The real action on the rupee might have to wait until June 15/16, when the US Federal Reserve meets and delivers a third rate hike. “It could trigger declines for the rupee and most emerging market currencies, mirroring what happened in May.”

Will that set the stage for rupee to hit the 22 mark to the dirham?

Upside risks to inflation as highlighted in last policy meetings have materialized earlier than expected. Inflation has steeply increased much beyond the upper tolerance level. A large part of the rise in inflation is primarily attributed to a series of supply shocks which can be linked to the (Ukraine) war

- Shaktikanta Das, Reserve Bank of India Governor after announcing the 0.5% rate hike