Will RBI hike rates in October?

The rupee has depreciated 10.5 per cent against the dollar this year, making it Asia’s worst-performing currency.

With the continued fall in the rupee, economists and bond market participants expect the Reserve Bank of India (RBI) to hike rates in its October policy.

The rupee closed at 71.57 a dollar, down from its previous record close of 71.18.

Other emerging markets currencies also fell against the dollar. The Indian central bank did not prevent the rupee’s fall.

The rupee has depreciated 10.5 per cent against the dollar this year, making it Asia’s worst-performing currency.

“If the rupee depreciation continues like this, a rate hike is the only orthodox textbook option left for the RBI,” said Soumyakanti Ghosh, group chief economist of the State Bank of India (SBI) group.

This would slowdown consumption significantly, Ghosh said. The central bank has hiked the policy repo rate twice this calendar year to 6.50 per cent, and economists were expecting till some time ago that this could be the end or, at most, one more hike could be in the offing.

Now some of them are of the opinion that a hike in October won’t be enough.

Indranil Pan, chief economist of IDFC Bank, who was penciling in another rate hike even before the recent rupee slide happened, said a rate hike at this point can give support to the rupee.

“It is like telling foreign investors that I am ready to give you higher interest rate, so come and invest,” Pan said.

The RBI’s fourth bi-monthly monetary policy would be announced on October 4. Rate hike pressure was there on the RBI anyway because of rising inflationary expectations.

But the recent movement, and accompanying oil price rise, is perhaps leaving the central bank no other option, according to Pan.

A rate hike at this juncture would make matters complicated for the government going into an election year.

The high rates could bring down demand and hit growth.

Demand compression is also expected on account of rupee depreciation, as imported products get costly.

The bond market has started positioning itself for a rate hike. The 10-year bond yields have started climbing and have crossed 8 per cent.

There is also a fear of oversupply by the states and the Centre. The rupee’s fall has been exacerbated by the rise in oil prices.

The benchmark brent crude was trading at $79.26 a barrel as supply from Iran got affected on US sanctions.

The rupee has also come under pressure due to weakness in the stock market.

The RBI has come under some criticism for its hands-off approach, but most in the market don’t expect the rupee to cross 72.50 level.

The central bank may not also want to intervene and lose its reserves considering that other emerging markets are also falling.

Photograph: Danish Siddiqui/Reuters