The US Fed in its latest policy meeting announced to hike rates by another 75bps and also raised concerns over inflation. On the domestic front, the trade balance number continues to show that the deficit is widening and that too has kept the rupee weighed down against the US dollar.
Inflation has been on the rise in India as well and that too has pushed the Reserve Bank of India (RBI) to raise rates by 90bps in this year.
The Fed in its policy statement mentioned that it would not flinch in its battle against the most intense breakout of inflation in the US since the 1980s even if that means a “sustained period” of economic weakness and a slowing jobs market.
The recent inflation number suggests that the central bank could go slow on raising rates than previously anticipated.
US consumer prices have been surging due to a number of factors, including snarled global supply chains, massive government stimulus early in the COVID-19 pandemic, and Russia’s invasion of Ukraine.
The CPI increased by a weaker-than-expected 8.5% following a 9.1% rise in June.
Apart from the global factors, domestic factors too haven’t been very impressive and that also has kept the rupee weighed down against the US dollar.
Data showed inflation on the domestic front has risen since September last year and remained above the upper tolerance band for straight six months from January this year.
The trade deficit has been consistently rising and the latest data showed the deficit rose to fresh record levels of $31billion in July. The surge in gold imports is putting pressure on the current account deficit.
In the first four months of this financial year, which began in April, India’s trade deficit reached $100bn — more than double the deficit during the same period last year.
On the fiscal front, the government is being cautious as fiscal slippage could undermine RBI’s efforts to manage inflation. Fiscal deficit for FY23 is seen at Rs.16.6lakh crore or 6.2% of GDP.
The higher expenditure and lower revenue had raised concerns that the fiscal slippage could stoke inflation, undermining efforts by the RBI.
We expect that similar to the Federal Reserve, RBI could also look to slow its rate hike pace as inflation on the domestic front is starting to ease off.
The RBI governor in its last policy meeting mentioned that inflation in India is starting to peak out but we feel that India Crude basket should sustain below $100 for a couple of quarters to call it a correction.
Going ahead, the pace of the rate hikes could be getting slow as slowing global growth leads to the softer pace of policy tightening.
We expect that the current domestic and global scenario could keep the rupee in a broad range and with RBI being active on both sides of the market to curtail volatility.
The USDINR in the next couple of months is likely to quote in the range of 78.10 and 80.80.
(Navneet Damani – Sr. Vice President – Commodity & Currency Research,
, and Co-authored by Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services)
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