MUMBAI: Weakness in the Indian Rupee does not offer a sufficient alibi for a rate hike and the Reserve Bank of India (RBI) may go for a status quo at the policy review next month, a Japanese brokerage said on Friday.
The markets have priced in tightening as well, but it is unlikely to materialise, Nomura said in a report.
“Because of the RBIs inflation-targeting mandate, currency weakness in itself may not provide a sufficiently strong argument for rate hikes,” its economists said.
It added that the August inflation data release has also surprised on the downside, with headline CPI inflation moderating to 3.7 per cent from 4.2 per cent in July.
The economists gave a 60 per cent probability for RBI staying on hold, they said, adding that “one cannot rule out” a hike on currency weakness and higher oil prices.
Unlike in 2013 round of rupee depreciation, which was driven by “idiosyncratic factors”, the troubles for the rupee are driven largely by global factors in the current round, it said.
“With currency weakness largely driven by global factors and the real rate cushion already quite high in India, monetary tightening is not necessarily an effective instrument for limiting currency depreciation,” they said.
It can be noted that the rupee has shed over 12 per cent this year against the dollar to be one of the weakest currencies. Simultaneously, crude oil prices are also shooting up, only aggravating the pain.
The RBI, which has been given the target to get inflation down to 4 per cent over the medium term, has hiked rates twice this year by a cumulative 0.50 per cent.
Source: Press Trust of India
