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BUSINESS EYE APRIL 03, 2023 | The Indian Eye 24

Moody’s warns of weakness

in Indian rupee as Feds hike

interest rate again

Depleting forex reserves faced with the high cost of imported goods, and the ongoing monetary policy

tightening by the US Federal Reserve triggered the currency’s depreciation

OUR BUREAU the Russia-Ukraine war outbreak.
Retail inflation in India fell mar-
New York/Mumbai
ginally but remained above RBI’s 6
he risk of weakness in curren- per cent upper tolerance band for
cies in the emerging economies the second straight month in Febru-
Tin Asia is worrisome, and more ary 2023, with the Consumer Price
so the risk is greater in India with a Index pegged at 6.44 per cent. In
new bout of rupee weakness, which January, the retail inflation was 6.52
could force the Reserve Bank of In- per cent.
dia to “press harder on the brakes”, India’s retail inflation was above
according to Moody’s Analytics. RBI’s 6 per cent target for three con-
The rupee weakness, accord- secutive quarters and had managed
ing to Moody’s, may slow in what it to fall back to the RBI’s comfort
earlier expected India to be one of zone only in November 2022. Under
emerging Asia’s best-performing the flexible inflation targeting frame-
economies. The Indian rupee had work, the RBI is deemed to have
been volatile for almost a year now failed in managing price rises if the
and hit several fresh all-time lows as CPI-based inflation is outside the 2-6
the US dollar strengthened against per cent range for three quarters in
major global currencies. In October a row.
2022, the rupee breached the 83- Meanwhile, the US Federal Re-
mark for the first time in its history. serve raised interest rates by a quar-
The rupee is currently hovering ter of a percentage point on Wednes-
above 82 per US dollar. day, but indicated it was on the verge
Depleting forex reserves faced of pausing further increases in bor-
with the high cost of imported goods, rowing costs amid recent turmoil
and the ongoing monetary policy in financial markets spurred by the
tightening by the US Federal Re- collapse of two US banks. The move
serve triggered the currency’s depre- set the US central bank’s benchmark
ciation. Investors tend to move to- overnight interest rate in the 4.75%-
wards stable markets, such as the US, 5.00% range.
for better and stable returns amid When the US Federal Reserve
any tight monetary policy. Retail inflation in India fell marginally but remained above RBI’s 6 per cent upper tolerance raises its domestic interest rates, the
Typically, the RBI, from time difference between the interest rates
to time, intervenes in the market band for the second straight month in February 2023 (ANI) of the two countries – US and India
through liquidity management, in- – decreases. That makes India less at-
cluding through the selling of dollars, “But further currency weakness the report said. tractive for the currency carry trade.
with a view to preventing a steep de- could put the region’s central banks The Monetary Policy Committee Consequently, some of the money
preciation in the rupee. in a bind,” it said. (MPC) of the RBI in the February may be expected to move out of the
“The risk of currency weakness About India’s inflation, the re- meeting decided to raise the repo Indian markets and flow back to the
in emerging Asia is especially wor- port said it was no longer rising, but rate, at which the RBI lends money US, therefore decreasing the value
risome given its status as the cradle higher food prices were a key con- to all commercial banks, by 25 basis of India’s currency against the US
of the EM (emerging market) recov- cern. points to 6.5 per cent. The rate hik- dollar.
ery. Our outlook calls for economies “Although the (RBI February ing spree started in May last year to The Reserve Bank of India is
in emerging Asia to handily outper- monetary policy) meeting’s minutes check inflation. expected to hike key rates as the
form the rest of the EM cohort as showed only one member concerned Since May last year, the RBI central bank will need to ensure that
China’s rebound gains momentum with the Fed’s pace of tightening, this has increased the short-term lending there is an interest rate differential
and as pent-up demand, still on hold could quickly change when the bank rate (repo rate) by 250 basis points, between India and the US to attract
from the Delta wave in India and meets in April, especially if faster to contain inflation, driven mainly dollars at a time when India is ex-
Southeast Asia, props up consumer Fed tightening and market jitters by external factors, especially global pected to witness a record current
spending,” Moody’s said in a report. cause the rupee to weaken further,” supply chain disruptions following account deficit.

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