Inflation and increasing rate cycle not going anywhere; things stable in India from a longer-term perspective | The Financial Express

Inflation and increasing rate cycle not going anywhere; things stable in India from a longer-term perspective

Inflation and increasing rate cycle are problems that will persist for a reasonable amount of time. And following the trend in the US Fed raising rate, India will have to continue to do the same in the foreseeable future

Inflation and increasing rate cycle not going anywhere; things stable in India from a longer-term perspective
The decline in reserve numbers, from 650 billion to 530 billion is alarming, yet from a longer-term perspective, things seem stable in India

By Nikhil Kamath

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), increased the policy repo rate by 50 basis points (bps) to 5.9% creating a ripple of changes including making loans expensive. The MPC also projected growth in FY23 from 7.2% to 7%. RBI governor Shaktikanta Das explained the rationale behind the rate hike was to limit the persisting high inflation, calibrate withdrawal of monetary accommodation to hold back increasing price pressure, and contain the impact. With the rupee depreciating consistently, I positively align with the move to increase the repo rate by 50 BPS. 

The RBI policy has largely aligned with expectations. The 50 basis point rise was expected by most market analysts. Largely, it signals that inflation and increasing rate cycle are problems that will persist for a reasonable amount of time. And following the trend in the US federal reserve raising rate, India will have to continue to do the same in the foreseeable future. 

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The major point of stress at the moment is the pronounced depreciation in the currency. One of the main reasons for the current currency slump can be attributed to the Fed raising rates by 75 basis points for a third consecutive time to curb US inflation. Diminishing reserves limit RBI’s propensity to intervene, higher interest rates will have to be maintained with hawkish tone in the policy to support the rupee.”

On the other hand, the fact that our currency is close to 82 today makes it really hard for us to not follow America in their rate hike cycle and match them. Stalling to increase the rates while America aggressively increases theirs will only lead to the rupee depreciating further. I think as long as oil remains elevated plus a strong dollar is bound to reduce the reserve number and increase the trade deficit number. The decline in reserve numbers, from 650 billion to 530 billion is alarming, yet from a longer-term perspective, things seem stable in India. RBI will have to watch over each of these trends keenly to act at the appropriate time. 

Also Read: Aggressive monetary tightening by RBI continues: Can NBFCs stay resilient?

From a market perspective, relatively we remain strong on the back of really large corrections in the NASDAQ, European markets, Japan even”. Indian markets have barely corrected and this relative strength in many ways is surprising and it will be interesting to see what happens going into the next quarter.

(Nikhil Kamath is the co-founder of Zerodha and True Beacon. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)

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