Mumbai: A sustained weakness in the rupee may push the Reserve Bank of India (RBI) to further tighten monetary policy, perhaps as early as next month, JPMorgan Chase and Co’s chief India economist Sajjid Chinoy said.
“The RBI meeting becomes an interesting dilemma,” Chinoy said, adding that after two interest rate hikes since June, he, like most in the market, thought the central bank had bought time before the next increase. At the same time, inflation is easing, with headline numbers for August likely to show that the consumer price index rose by less than 4 per cent from a year ago, he said.
That easing will bring inflation in line with the central bank’s aim of keeping it at the 4 per cent midpoint of its target band. After delivering back-to-back rate hikes to cool price pressures in the world’s fastest-growing major economy, Governor Urjit Patel said there was a rising threat from global trade wars, with potential implications for investment and exports.
This led many to believe the rate-setting Monetary Policy Committee will switch to a wait-and-watch mode in coming months.
But the rupee’s rapid fall in August might force the RBI’s hand sooner, Chinoy said. The Indian currency lost 3.5 per cent last month and is the worst performer in Asia so far this year, mainly due to worries about a widening current-account deficit. The MPC is scheduled to announce its next decision on October 5.
“The joker in the pack is the currency,” Chinoy said. “We have seen all emerging market current account-deficit countries come under pressure in the last two months despite a weaker dollar index. And if that continues and the RBI is losing reserves at the rapid pace, then the October meeting very much comes into play and the strong GDP print enables that.”
India’s fast-paced growth may have peaked
India’s world-beating economic growth is running up against some big risks: high oil prices, emerging market stress as the era of easy money draws to a close, and policy paralysis in the run-up to next year’s federal election.
Those factors may push the rupee — Asia’s worst performer this year — even lower, as well as dampen some of the optimism that has propelled the stock market to record highs. They also serve as a reminder to investors that Asia’s third-largest economy, which has overcome the twin shocks of a cash ban and the chaotic introduction of a nationwide consumption tax, is not fully out of the woods yet.
“The outlook for the remainder of the year is not as optimistic,” said Priyanka Kishore, head of India and South East Asia Economics at Oxford Economics Ltd in Singapore. “Reform momentum is likely to slow ahead of the 2019 general election, as the government shifts focus to capturing votes.”