Weak rupee casts shadow on rate cut in July policy

After cutting interest rate thrice in 2013, RBI paused in mid quarter policy review last Monday citing recent depreciation of rupee

Hopes for a cut in policy rate from the Reserve Bank of India (RBI) in the July policy review are fading fast with the rupee coming under renewed pressure after the US Fed chairman Ben Bernanke hinted they might taper the QE later this year, which led to a sell-off in the emerging market currencies.

After cutting the policy rate thrice in 2013, the central bank) paused in the mid-quarter policy review on Monday citing the recent depreciation of rupee would add pressure on prices.

As a result, though inflation has fallen within the five per cent RBI’s comfort zone, and gross domestic product (GDP) growth for 2012-13 has fallen to five per cent — the lowest in a decade — market participants are not expecting a rate cut if the currency continues to weaken.

Headline inflation, as measured by the wholesale price index (WPI), moderated to an average of 7.3 per cent in the 2012-13 financial year from 8.9 per cent in the year before. In both April and May of this financial year, WPI inflation fell below five per cent. (4.7 per cent in May and 4.89 per cent in April).

“Going ahead, the rupee is likely to continue with its bearish trend, as the dollar has started gaining momentum once again,” said Abhishek Goenka, Founder & CEO, India Forex Advisors.

The central bank will review its monetary policy on July 30.

A fall in rupee will worsen the current account deficit, which was 6.7 per cent of GDP in the third quarter — much higher than the 2.5 per cent comfort zone of the central bank.

“While several measures have been taken to contain the current account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows,” RBI had said in its mid-quarter review.