The RBI has again seen its rates rise as the rupee's decline accelerates

MUMBAI (Reuters) – The Reserve Bank of India (RBI) is expected to raise rates for the third time since Friday, to combat inflationary pressures in the face of the weakening of the rupee, soaring prices. oil price and market instability default of the bank financing company.

The expectation of a rate hike has increased over the past month as oil prices rise, the rupee falls and liquidity concerns grow.

Rising US interest rates, emerging market capital outflows, a weakening balance of payments, and India's current account deficit are also expected to drive the central bank.

An increase in rates should make domestic debt yields more attractive to foreign investors and contain inflationary pressures resulting from high crude oil prices, India importing more than two-thirds of its oil needs.

The Monetary Policy Committee will raise interest rates by 25 basis points to combat the risks of inflation arising from the high cost of crude oil and the low rupee, as well as to "ensure sustainable liquidity". predicts A. Prasanna, chief economist at ICICI Securities Primary Dealership.

"You can not wish to depreciate the rupee if you are a country in current account deficit," he said, adding that another reason for the rise was that India did not " not decline in interest rate differential, as central banks globally raise interest rates. "

A 25 basis point increase in repo rates to 6.75% would mean a 75 basis point increase since June, the largest increase since the last tightening cycle, between September 2013 and January 2014, when India has had its worst currency crisis since the 1990s.

A poll conducted by Reuters from 19 to 25 September revealed that 35 of the 64 respondents expected a rate hike on Friday. According to a survey conducted in July, only 11 of 56 respondents had predicted a rate of 6.75% by December.

While the majority of analysts expect a quarter point increase, some analysts said they would not be surprised by the 50 basis point increase, given soaring oil prices and pressures from the rupee.

The rupee, which averaged $ 74 on Thursday, fell by 13.5% in 2018, making it the weakest currency in Asia.

Emerging market central banks, including Indonesia, Argentina, the Philippines and Turkey, have raised interest rates to contain inflationary pressures and weak money, with the US Federal Reserve continuing to raise rates.

MARKETS IN EDGE

The RBI should also assure the markets that sufficient funds are available after the panic of investors when a series of debt defaults contracted by Infrastructure Leasing & Financial Services (IL & FS) led to a buy-back pressure at D & # 's. Other companies in the shadow banking sector.

India's inflation rate was 3.69% in August and is expected to exceed the 5% expected by the RBI by June 2019 due to rising fuel prices, rupee weakness and high consumer spending.

The 10-year benchmark bond yield has risen 50 basis points to 8.20% since the last August policy meeting.

Radhika Rao, an economist at the DBS, expects a rate hike and the RBI's position to move from "neutral" to "hawk".

"For the bond markets, a 25 basis point rise accompanied by a hawkish attitude could boost the yield of 10-year bonds to 8.25%," Rao told Reuters after rising yields on Thursday.

BALANCING

IL & FS debt issues have led to a sharp rise in short-term interest rates as one-year commercial paper has risen nearly 70 basis points to 9.20% since the beginning of the month. August, while the rate of US Treasury bills rose 50 basis points to 7.73%.

One of the underlying problems is that the sale of RBI dollars to stem the fall of the rupee has drained Rs.1,500 billion since April.

Analysts on Friday ruled out the possibility of a reduction in the central bank's cash reserve ratio (CRR).

In order to alleviate the fears of lack of liquidity, the RBI unexpectedly presented a vast program of purchase of bonds worth 340 billion rupees (4.61 billion dollars). dollars) for October, in addition to the 200 billion purchases last month.

"The RBI is ready to keep real rates high because the political mandate is to anchor inflation," said Anindya Banerjee, assistant vice president, Kotak Securities' Currency Derivatives.

"High real rates are the main pillar of the rupee policy. Increasing the repo rate will increase real interest rates and help attract new inflows of foreign capital, which will help contain the rupee. "

(1 $ = 73.7600 Indian rupees)