RBI set to hold rates while confronting weak rupee amid West Asia conflict

By Anup Roy and Subhadip Sircar

 

The Reserve Bank of India is likely to hold interest rates on Wednesday in its first policy decision since the Iran war, as it grapples with a sharply weaker rupee while trying to support economic growth. 

All 30 economists surveyed by Bloomberg expect the central bank to keep the benchmark repurchase rate unchanged at 5.25 per cent, after the RBI signaled a prolonged pause at its last meeting, though the outlook has since clouded.

 

The West Asia crisis has left the six-member Monetary Policy Committee led by Governor Sanjay Malhotra in a tough spot. The rupee’s slide since the conflict began has emerged as a key pressure point, prompting the central bank to take some of its most aggressive steps in over a decade to curb speculative bets against the currency. The RBI now faces a dilemma over whether to raise interest rates to support the currency or keep borrowing costs low to cushion economic growth. 

 

 

Even as economists expect the RBI to focus on calming markets this week, they say it may eventually be forced to raise rates if the Iran war drags on, as costlier energy imports risk fueling inflation. Standard Chartered Plc. economists Anubhuti Sahay and Saurav Anand said while they don’t expect a rate hike in April or this fiscal year, there’s a “risk of a 25-50 basis points increase in the repo rate if a sustained rise in energy prices pushes global rates higher, putting further pressure on the Indian rupee.”

 

India, which relies on West Asia for about half of its crude and most of its cooking gas, has been hit hard by the effective closure of the Strait of Hormuz. The rupee has tumbled 7.6 per cent over the past year, making it Asia’s worst-performing currency. Benchmark yields have surged to near two-year highs as crude prices spike, with any signal of monetary tightening likely to further roil markets.

 

Sakshi Gupta, an economist at HDFC Bank Ltd., said markets are looking for “conditioning and reinforcement of the RBI’s commitment to maintaining rupee stability,” adding that the central bank’s view on rupee depreciation will be key to shaping expectations going forward.

 

Investors will focus on Malhotra’s 10 am speech for cues on the policy path and the RBI’s stance on the rupee. “Communication will be key” this week, said Gaura Sen Gupta, an economist at the IDFC Bank Ltd., as “the April policy comes at a time when it may be too early to react to the unfolding West Asia crisis.” 

 

Rupee 

The RBI recently has taken some of its most forceful steps in the currency market by cracking down on speculative trading. After the rupee slid past 95 per dollar, the RBI capped banks’ daily currency positions at $100 million and barred them from offering non-deliverable forwards to clients. The rupee has since rebounded nearly 2 per cent. 

 

While policymakers will refrain from raising rates just yet, the central bank could consider some additional measures to control the currency. One immediate option is to open a dedicated dollar swap window for oil refiners, who account for $250 million to $300 million in daily demand. It is a playbook the central bank used during the 2013 taper tantrum, when the RBI supplied about $12 billion to refiners as the rupee slid past 60 per dollar — then a record low.

 

Growth 

Investors will also watch for any comments from Malhotra on the impact of the war on India’s growth. In February, the central bank had held back from providing full-year growth and inflation forecasts, as the government was in the process of revising the data series. The mood was more upbeat then, with policymakers expressing confidence in growth of over 7 per cent following an interim trade deal with the US. The RBI also said inflation would likely remain around its 4 per cent target at least through September. 

 

Those assumptions may now need to be reassessed in light of the conflict, with some economists sharply cutting growth forecasts to reflect India’s oil dependence. Goldman Sachs sees calendar year growth at 5.9 per cent, while Standard Chartered has lowered its forecast for the current financial year to 6.4 per cent from 7 per cent.