RBI May Support Free falling Rupee by Hiking Rates by 50 BP

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reserve bank of India sign RBI

Indian Currency is continuously low down, the rupee lost 0.32%, which landed it on 71.99 per dollar.

RBI is on a mission to save the money from meeting a terrible fate. On Thursday, the rupee hit an all-time low of 72.11, which marked the eighth day of the trend of loss encountered by the Indian currency. The rupee lost 0.32%, which landed it on 71.99 per dollar. 

Presently, both the emerging markets belonging to the two hemispheres are not in a good shape, resulting in the triggered rate of interest. This may end up in the capital flight.

India had not foreseen to follow the path carved by Indonesia and Argentina to raise the cost of funds. However, RBI may raise the rates by 50 basis points by the end of the current year to save the currency from crashing. 

The Central Bank has no choice but to hike the rates in the upcoming policy meetings, as the Interest Rate Swap has reached to the highest point in the last 3 years. These meetings are scheduled to be held in October and December. This is a derivative measure that allows the investors to interchange the fixed rates for the floating rate. The one-year-old gauge has hit 7.30%, which had resulted due to the spike of 35 basis points during the past month. 

According to the CFO and Executive Director of the Federal Bank, Ashutosh Khajuria, the current scenarios are the indication that the rate will increase further as the rupee will meet with a new low of all times. He also mentioned that the triggering value of the rates may invite the foreign cash flow while the global investors may end up in the debt papers. 

He mentioned that the economy of India is not similar to that of the economies belonging to Turkey, Indonesia, and Argentina due to the Forex reserves and other macro parameters like GDP and fiscal deficit. India has a domestic-centric economy while these 3 countries prefer restricting to the limited commodities and are susceptible to an exterior business cycle. 

In Argentina, the rate of interest has touched 60% to deplete the 31% inflation and is considered as the worst performing economy along with Turkey. 

The Head of the Fixed Income at the IDFC IMF, Suyash Choudhary stated that the steep decline in the value of money has led to various speculations, among which the hiked rate of interest is worrying a few. In fact, the depleting value of the local unit may also lead to the higher liquidity in the system. 

In the quarter of April-June 2018, the economy of India expanded by 8.2%, which is the highest in the past two years.

After scrutinizing the present scenario, the Executive Vice President at PNB Gilts for the fixed income, Vijay Sharma stated that the robust GDP and depleting value of rupee may compel the RBI to hike the rates of interest uniformly. This will be opposite of the other emerging markets that have opted for a steep hike. 

The Treasury bill of 364 days has produced 20 BP higher at the rate of 7.52% in the primary market while the short-term rate of interest is already on the rise.

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