Published: Sun, October 07, 2018
Money | By Ralph Mccoy

Strong US economy buoys dollar, puts Asian currencies on skids

Strong US economy buoys dollar, puts Asian currencies on skids

The rupee opened a tad strong at 73.56 a dollar against its previous record low closing of 73.58.

The usual central bank response to a weak currency is aggressive policy tightening, like Indonesia and the Philippines, who have had 150 bp rate hikes recently. Authorities have moved to ring-fence Infrastructure Leasing & Financial Services, while the RBI has pledged to inject $5 billion into the system through bond purchases as it tries to ease the liquidity squeeze.

"The RBI voting for a pause indicates that there is an attempt on its part to address the domestic macroeconomic fundamentals to tackle headwinds in the global market".

After two successive hikes, the repo rate now stands at 6.50 per cent.

"The Reserve Bank of India's MPC was expected to hike rates in its latest monetary review, given the impact of petroleum prices as also rupee value in the global currency market". We won't be surprised by more than a 25 basis point hike, but still, we revise our end-year forecast for USD/INR to 75 from 73.5.

Monetary Policy Committee (MPC) started its meeting Wednesday and is expected to arrive at a resolution Friday.

On one hand, inflation expectations in India have risen sharply - a scenario that typically makes a rate hike more likely.

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According to Madhavi Arora, Economist, FX and Rates, Edelweiss Securities said: "The RBI is clearly of the view that they should let underlying trade competitiveness improve gradually as the trade-weighted exchange rate acts as a natural stabiliser".

"The central bank exudes confidence in managing inflation and reposes confidence on economic growth".

"The rupee has made a new record low today on back of consistent rise in the crude oil prices", Rushabh Maru, Research Analyst at Anand Rathi Shares and Stock Brokers, told IANS. It further noted that inflation will clock 3.8 per cent in the third quarter of 2018-19 and 4.5 per cent in the next quarter of the current fiscal.

Taking a more gradual approach to raising rates should make it easier to sustain economic growth, with the RBI forecasting expansion of 7.4 percent for the financial year ending in March and 7.6 percent for the following year.

The second is the pressure on global crude oil prices.

The country has not been immune to global spillovers from external factors, he said.

The good news for the moment has been the stance of the RBI that has boldly decided not to increase the rates despite the given challenges. "I feel there will be an increase of 25 basis points in the repo rate", Union Bank of India managing director and chief executive Rajkiran Rai G said.

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