Fed or not, RBI can focus on controlling inflation
The Reserve Bank of India (RBI) is likely to focus unerringly on domestic expansion, even as global business sectors worry whether the US Federal Reserve will turn to a more-than-expected rate hike or cut soon enough to avoid disaster for the US economy .
Global business sectors are picking up dovish words in remarks by US Federal Reserve Chairman Jerome Powell after he said future rate hikes would be entirely dependent on information referring to a positive unbiased rate. However, some point out that Powell did not remove the option of another point hike with 75 premises. The default point is 100. 100th rate point. The dollar list gave up some of its fresh gains, value markets in Asia rose and bond yields eased somewhat.
The Fed is next, assuming it exists, it has proposals to develop business sectors because it could adjust the direction of dollar flows. For the RBI, the Fed’s turnaround would perhaps reduce the pressure on the rupee and possibly the inflationary pressure as well. Still, financial analysts concede that the channel of dollar flow that feeds the Fed’s language to domestic shores through the activities of unknown financial backers is unlikely to overwhelm the RBI’s strategic thoughts in a week. “In my brain, there have been a lot of FPI spikes before, temporarily unstable. DXY doesn’t have to go to the extreme, and excessive INR doesn’t drain from there. So that part won’t be the main idea.” for RBI,” said Saugata Bhattacharya, Chief Economist, Axis Bank.
In addition, the RBI has taken steps to support the Indian rupee and would rather see it do well. Earlier this month, the RBI allowed banks to raise foreign deposit rates to attract dollars. In addition, norms were relaxed to allow greater participation of foreign investors in domestic debt. In addition, the central bank intervened in the market to prevent the devaluation of the rupee. Governor Shaktikanta’s recent comments suggest that the RBI will continue to intervene to keep the rupee at a level consistent with economic fundamentals. The central bank is not worried about a decrease in its foreign exchange reserves. “Buy an umbrella to carry when it rains,” said Das.
We are left with the trade channel effect. A weak currency becomes a bugbear on the inflation front as it adds to the inflationary problem in a net importing country like India. Inflation can be targeted regardless of its source. Retail inflation remains uncomfortably above the RBI’s mandate of 2-6 percent. Most economists see the RBI’s rate-setting committee voting to raise the repo rate by at least 35 basis points at its meeting next week. “The RBI will continue to focus on containing domestic inflation in the August policy. Despite any surprises from the Fed, we expect the RBI to remain on track to raise the repo rate by 35 basis points and continue its hawkish stance,” said Suvodeep Rakshit, chief economist at Kotak Institutional Equities, in a note. Others like Indranil Pan, chief economist at YES Bank, expect a 50 bps hike.
It is easier for the RBI to deal with inflation through an increase in exchange rates than through the exchange rate channel. After all, the experience of 2013 shows that too much intervention does not help when the tide turns against domestic markets. The Fed’s tightening at the time resulted in a sharp fall in the rupee, which the RBI was unable to stop. However, its foreign exchange reserves are quickly depleting and rate hikes to attract dollars have failed.
About The Author
1 thought on “Fed or not, RBI can focus on controlling inflation”