Dubai: The Indian rupee is holding slightly higher at 21.52 to the dirham, with the central bank announcing a 0.50 per cent rate hike - its third since April. The latest comes on top of the 1.30 per cent rise since May and takes the Indian repo rate to 5.4 per cent.
The rupee, which had firmed up in the morning, is holding steady in the 21.52-21.55 range. "With inflation expected to remain above the upper tolerance threshold in Q2 and Q3 of the current financial year, the MPC (Monetary Policy Committee) stressed that sustained high inflation could de-stabilise inflation expectations and harm growth in the medium term," RBI Governor Shaktikanta Das said.
Indian expats in the UAE will have some waiting and watching to do over the next few days. The latest rate hike – meant to curb inflation that has crossed 6 per cent – could mean the rupee firming up to the dollar/dirham.
"The RBI’s repo rate hike to 5.4 per cent is in line with the expectations of the market to ease inflation woes," said Adeeb Ahamed, MD of LuLu Financial Group. "We are seeing similar interest hikes in other prominent economies as well. The rupee may have weakened considerably in recent weeks, but has bounced back.
"The worry over inflation, trade deficit and volatile oil prices are indeed a cause for concern, but we feel the rupee will do slightly better. Rupee is at 79.20-79.25 against the USD, and we expect it to be in the range of 78.68-79.74 until next week."
We wouldn’t see much of depreciation of rates. We could expect INR around 78.80 to 79.40. I could see the Dollar Index also weaken.
The last four days have shown glimpses of what could be in the offing – the rupee had strengthened to 21.42 on August 2 and then went on to slip to 20.65/20.70 levels on August 4. “Even if a rate hike raises rupee’s strength, there are other factors in play – Taiwan, Ukraine, inflation and recession talk – that could weigh it down,” said a treasury analyst in Dubai. “UAE Indian expats need to time their next remittance only after checking all trends in the next three, four days.”
In the event of a 0.35-050 per cent hike in the coming hour or so, the rupee's range for the day could be 78.95-79.38. Yesterday's closing was at 79.46.
With inflation expected to remain above the upper tolerance threshold in Q2 and Q3 of the current financial year, the MPC (Monetary Policy Committee) stressed that sustained high inflation could de-stabilise inflation expectations and harm growth in the medium term
How has the rupee been faring?
“The dollar index (which measures dollar’s strength/weakness against key currencies) is up by 14% in last one year,” said Amit Jain, Co-founder of Ashika Global Family Office Service. “During the same period, euro weakened 12 per cent to its 20-year low, and GBP has fallen 13 per cent.
During this period, INR has slipped only 6 per cent compared to other leading currencies of the world. This performance is attributed to new records created by Indian exports and strong inflow of domestic money into Indian stock market. In my personal view, it will be difficult for INR to go below 81/82 during 2022.
- Amit Jain, Co-founder of Ashika Global Family Office Service
"Also, Indian investors infused more than Rs3 trillion into the stock market, which has almost nullified the ferocious FII selling of last one year. This inflow of domestic investors has averted a negative pressure on the rupee during this relentless selling by FIIs."
Property buyers will get hurt
The latest rate hike has the potential to further slow down activity in India’s residential property market.
“A rate hike was expected, but the expectation was for a maximum of 35 bps,” said Anuj Puri, Chairman of Anarock group. “Home loan lending rates will now edge further into the red zone.
“This is the third consecutive rate hike in the last two months and finally marks the end of the all-time best low-interest rates regime - one of the major factors that drove housing sales across the country since the pandemic. This whammy comes along with the inflationary trends of primary raw materials, including cement, steel, labour, etc., that have recently led to a rise in property prices.
“Together, these factors – rising home loan rates and construction costs – will impact residential sales that did reasonably well in the first-half of 2022.”
The (India) repo rate now stands at 5.4%, thus reaching the pre-pandemic levels. While inflation has partially eased as compared to the surge in April, it continues to be above the RBI’s target
This is a third increase in a row and the MPC remains focused on withdrawal of ‘accommodative’ stance.
The major reasons for this decision are: (1) managing inflationary pressure, as inflation is expected to remain above upper tolerance threshold in Q2-FY23 and Q3-FY23; (2) managing the second round effects of current high inflation; (3) elevated core inflation; and (4) risk of higher food inflation owing to uneven distribution of monsoon rainfall.
FY-23 inflation forecast is retained at 6.7 per cent. The MPC has stressed that sustained high inflation could harm growth in the medium-term.
FY2-3 GDP growth forecast retained at 7.2 per cent.
On currency front, the RBI maintained that depreciation of INR is primarily due to strength of the dollar, rather than any weakness in India's macro fundamentals. The RBI will remain focused on maintaining stability of INR.
- Ashika Group