The Reserve Bank of India (RBI) is expected to maintain interest rates at its June monetary policy meeting while adopting a more hawkish tone, according to a new report by Bank of America (BofA) Global Research.
Indian central bank is facing a difficult balancing act between supporting economic growth and defending the Indian rupee, which has come under pressure amid global geopolitical tensions, rising commodity prices, and widening trade deficits.
BofA noted that India's domestic economic conditions do not currently justify an immediate rate hike. Consumer price inflation stood at 3.48% in April, below the RBI's 4% target, while economic growth remains moderate and industrial activity shows limited signs of overheating.
Although wholesale inflation has surged due to higher global commodity and energy prices, the pass-through to consumer prices has so far been limited. Core inflation remains relatively stable at around 3.7%.
Financial markets, however, are increasingly pricing in future rate hikes. According to BofA, investors expect more than 100 basis points of tightening over the next year as concerns grow over the rupee's weakness and imported inflation.
The report says the conventional response to currency weakness would be to raise interest rates, making rupee-denominated assets more attractive and reducing import demand. However, BofA questions whether a small increase would be effective, arguing that only a large hike would significantly influence market sentiment and support the currency.
source https://www.investing.com/news/economy-news/rupee-under-pressure-but-rbi-unlikely-to-rush-into-rate-hikes-4717933
