The US Fed announced a further 75 bps hike in rates in its latest policy meeting and raised concerns over inflation. On the domestic front, the trade balance numbers continue to show that the deficit is widening and that too has kept the rupee lower against the US dollar.
Inflation is also rising in India and that too has prompted the Reserve Bank of India (RBI) to increase rates by 90bps this year.
The Fed noted in its policy statement that it would not back down in its fight against the most rapid breakout of inflation in the US since the 1980s, even if it meant a “sustained period” of economic weakness and a slowing jobs market. Are.
Recent inflation numbers suggest that the central bank may proceed at a slower pace on raising rates than previously expected.
US consumer prices are rising due to a number of factors, including global supply chains, massive government stimulus at the start of the COVID-19 pandemic, and Russia’s invasion of Ukraine.
After rising 9.1% in June, the CPI grew by a weaker 8.5 per cent than expected.
Apart from global factors, domestic factors have also not been very influential and this has also kept the rupee weak against the US dollar.
The data shows that inflation on the domestic front has picked up since September last year and remained above the upper tolerance band for six straight months since January this year.
The trade deficit continues to widen and the latest data shows the deficit widened to a new record high of $31 billion in July. The rise in gold imports is putting pressure on the current account deficit.
In the first four months of this fiscal year that began in April, India’s trade deficit reached $100 billion, more than double the deficit during the same period last year.
On the fiscal front, the government is being cautious as fiscal slippages could undermine the RBI’s efforts to manage inflation. The fiscal deficit for FY23 is seen at Rs 16.6 lakh crore or 6.2% of GDP.
Higher expenditure and lower revenue had raised concerns that fiscal slippages could drive inflation, undermining the RBI’s efforts.
We expect the RBI, like the Federal Reserve, to slow down its rate hike as inflation on the domestic front begins to ease.
RBI governor in his last policy meeting had mentioned that inflation is peaking in India but we think India crude basket should maintain below $100 for few quarters to call it a correction.
Going forward, the pace of rate increases may slow down as slow global growth slows policy hardening.
We expect the current domestic and global scenario to keep the rupee in a broad range and RBI is proactive on both sides of the market to reduce volatility.
USDINR is likely to remain in the range of 78.10 and 80.80 for the next few months.
(Navneet Damani – Senior Vice President – Commodity and Currency Research,
and Gaurang Somaiya, Forex and Bullion Analyst, Motilal Oswal Financial Services co-authored)
(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not represent the views of The Economic Times)