Run up to monetary policy: Hawkish stance to weaken rupee

Run up to monetary policy: Hawkish stance to weaken rupee

The Reserve Bank of India (RBI), which is widely expected to maintain status quo during the second bi-monthly policy review on 3 June, but the hawkish stance to the policy is expected to weaken the currency though bond markets may remain range bound

The Reserve Bank of India (RBI), which is widely expected to maintain status quo during the second bi-monthly policy review on 3 June, but the hawkish stance to the policy is expected to weaken the currency though bond markets may remain range bound.

According to market participants, if the central bank continues to adopt a hawkish stance then it will dim any possibility of a rate cut in the near future, which will affect inflows - a key factor that will decide the direction of the currency. India Inc is clamoring for a rate cut to lift economic activities after GDP growth hit decade low last fiscal.

Today RBI governor Raghuram Rajan said in New Delhi that fighting inflation would continue to be a top priority for the central bank. However, he is also added RBI will aim to strike a balance between growth and inflation.

"The market has factored in a status quo in key policy rates and a hawkish stance by RBI due to which the yield on the 10-year bond may move up by 5 basis points on that day. The rupee may depreciate by about 30 basis points if the hawkish stance is maintained," said Ashutosh Khajuria, president (treasury), Federal Bank.

According to experts the fall in rupee against the dollar is seen continuing also because RBI keeps intervening in the market to mop up dollars in a bid to boost their foreign exchange reserves. Latest data shows that RBI's foreign exchange reserves rose by $ 1.09 billion for the week ending May 16 to $ 314.93 billion. The reserves are consistently rising week after week.

The rupee has appreciated by nearly 5% in 2014. According to currency dealers the appreciation would have continued due to narrowing Current Account Deficit (CAD), but at the same time RBI has been buying dollars which halted the pace.

"If RBI's guidance is hawkish then it shows that growth may continue to be a concern and this impacts fund flows into the country due to which the rupee may weaken on that day. Similarly, though the market has discounted hawkish stance by RBI, yields may move up by 5 basis points," said the head of treasury of a state-run bank.

The yield on the 10-year bond ended at 8.67% on Tuesday compared with previous close of 8.68%. The rupee on the other hand ended at Rs 59.04 a dollar against previous close of Rs 58.72.

Short-term are not seen moving much from current levels as they are a function of liquidity in the system. But a hike or cut in the repo rate would also impact short-term rates movement. The repo rate currently stands at 8% and it was kept unchanged in the first bi-monthly monetary policy held in April.

Here are few experts who believe the signals from the central bank may not be hawkish.

"RBI's focus will continue to be on retail inflation but signals on the way forward may not be hawkish given the immediate need for the new government to restore the animal spirits to spur economic development," said Moses Harding, group chief executive officer (liability and treasury management) & chief economist, Srei Infrastructure Finance.

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Rajesh Kumar Kathpalia ¤ SMC Global
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