With the recent fall in commodity prices including crude oil coupled with a depreciating rupee, the Reserve Bank of India (RBI) will be in no hurry to cut interest rates, even though trade and industry bodies have been lobbying hard with the government for cheaper funds to boost growth.
According to bankers, any move to cut rates would be detrimental to the exchange rate parity as foreign institutional investors who punt on the arbitrage rate differential will soon exit, leading to further weakening of the rupee.
The currency that has been hovering between 61 and 62 to the dollar till recently weakened to 63.55 a dollar on Tuesday.
On the other hand, bankers also do not expect the RBI to hike rates as Russia did on Tuesday where rates were hiked from 10.5 to 17% to stem the falling rouble. However, the currency plunged by 11% to 72.5 a dollar in late trades. "Russia is an exporter of commodities, hence its currency came under pressure as dwindling oil and other commodity prices hit its oil exports, adversely impacting its current account deficit. This is not the case with India," said a senior banker at a government bank.
"In my view, interest rate cuts are likely only around March. Given the worry about emerging markets due to the falling commodity prices and crude, in particular, the RBI is likely to hold on for a month or two," said Keki Mistry, vice chairman at HDFC.
Most bankers agree that the rupee has come under external pressure and is on a sticky patch.
"What the RBI has feared has come true on the currency pressure. We still do not have a clear case for a rate cut," said Moses Hardings, group CEO and chief economist at Srei Infrastructure.
The currency has been falling largely due to external pressures like falling crude, weak global markets with eluding revival in the near term. "The stakeholders are not confident of growth for the next 5-10 years and has set pessimism on the overall economic growth. Now it is a global traction till stability is achieved," said Hardings.
"Whenever there is nervousness in the markets, money has always flown back to the US, said a treasury head at a foreign bank.
At home, the 0-year G-sec yields that were showing signs of easing have now inched up and were hovering around RBI's repo rate of 8% from Monday's 7.8% levels.
Even though India has benefited from the weak global crude prices that have dipped to below $60 a barrel on Tuesday, the widening trade deficit on account of non-oil imports like gold and machinery have caused heartburn for policy makers. Trade deficit has widened to 18-month high in November to $16.9 billion, following a 34% spurt in gold imports to $5.6 billion.
While imports of machinery and transport equipment (up 40% month on month) were seen as a step in the right direction to spur growth, the meltdown seen in global economies has become worrisome, said an economist at an equity brokerage firm.
"The IIP and inflation numbers have increased the justification for a rate cut. However, a weaker currency would now merit a postponement of an interest rate cut. Though the markets continue to expect a rate cut it would more likely be after the February budget of the government," said K Harihar, treasury head at FirstRand Bank.
India's growth slowed to 5.3% in the July-September quarter as against the 5.7% of the previous quarter.
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