If the rapid fall in Indian rupee, which has declined 13% against US dollar since the beginning of this year, continues like this, global ratings agencies and investments banks expect the Reserve Bank of India to hike interest rates again in the upcoming October policy review. On Monday, Rupee closed at Rs 72.46 after touching an all time low in intra-day trading at Rs 72.67 against the US dollar, pulling back marginally from Rs 71.73 on Friday.
According to Radhika Rao, economist, Group Research, DBS Bank, if rupee continues to remain under pressure, the central bank might raise interest rates in October citing risks to “inflationary expectations and second order impact of a weak currency”, The Indian Express reported. In this calendar year, the RBI has increased the policy repo rate twice to 6.50%.
Care Ratings said in a report that considering rising inflation and higher fuel prices, the central bank would be forced to take actions on the interest rates and there could be an another increase in policy rates of at least 25 basis points. The fourth bi-monthly monetary policy by the RBI would be announced on October 4.
Swiss Bank UBS expects an increase of 50 bps in repo rate for the rest of financial year 2018-19, given the several factors including rising fuel prices, capital outflow and political uncertainty leading to financial stability concerns. UBS has also revised its year-end forecast for rupee to 73 against 66 earlier.
Further, the Swiss bank said that India is one of the five major emerging economies that are running a basic balance deficit.
Meanwhile, Moody’s Investors Service said on Monday that continues weakening of the Indian currency would be credit negative for its rated Indian firms, especially for those that generate revenue in rupee, but rely of dollar debt to finance their operations and have dollar-based costs.