Bonds Rally in India After RBI’s Surprise Move

Rupee plunges to fresh record low of 73.77 against dollar

Rupee plunges to fresh record low of 73.77 against dollar

This policy review arrives at a time when oil prices and USA interest rates are at an all-time high, the Indian rupee is at a record low pressured by a widening current account deficit, making credit markets nervous. Analysts believe that rise in the crude oil prices along with steep depreciation in the rupee might surely push inflation higher in coming months.

The Indian central bank's intervention on Wednesday to calm down money markets proved short-lived in containing the fall of the rupee and its fallout on the stock and bond markets.

A hike in interest rates at this point can also help the external balance situation as higher interest rates (which means better returns) might attract more foreign inflows.

The six-member monetary policy committee (MPC) after its meeting said the decision was taken on the basis of a 5:1 majority.

The repo rate remains at 6.50 per cent.

There were expectations that hiking interest rates could slow rapid inflation in the country. "However, there is a probability that the central bank would change the stance from "neutral" too, as three successive rate hikes with a "neutral" stance could contradict the RBI message", the report said.

He however warned that a fiscal slippage on the centre or state level will not bode well for the economy. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals, it said.

"First, the government announced in September measures aimed at ensuring remunerative prices to farmers for their produce".

The resolution said actual inflation outcomes have been "below projections" as the expected seasonal increase in food prices did not materialise and inflation, excluding food and fuel, moderated.

Even as the government has moved to bail the troubled infrastructure finance company out, the uncertainty surrounding restructuring of the company continues to be an overhang on financial markets. Despite the rise in oil prices, the headline inflation number came down to 3.69 per cent for August as against 4.17 per cent for July.

At its policy meeting on Friday, the Reserve Bank of India is expected to raise rates for a third time since June to check inflationary pressures as it grapples with a depreciating currency and surging oil prices.

The monetary policy committee voted 4-2 in favour of keeping the main rate on hold at 6.5%, though it shifted its "stance" in favour of "calibrated tightening".

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