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The weak rupee is not likely to persuade RBI in hiking the repo rate in the upcoming monetary policy. Instead, it would be inflation which has stayed above RBI's comfort zone since January this year. RBI has taken an aggressive approach to tame inflation and raised the key rate by 90 basis points in the last two months. It needs to be noted that RBI is an inflation trajectory central bank and policy outcomes depend on the movement of a consumer price index.
CPI inflation moderated slightly to 7.01% in June compared to 7.04% in May 2022. However, inflation remained elevated and above RBI's upper limit of 6% for the sixth consecutive month. Notably, CPI inflation peaked at 7.79% in April. Meanwhile, food inflation moderated to 7.75% in June compared to 7.97% in May and 8.09% in April this year.
RBI increased its policy repo rate by 40% basis points in May followed by another hike of 50 basis points in June. The policy repo rate currently stands at 4.90%. Also, RBI has decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
On Thursday, RBI rescheduled the next monetary policy meeting. It will now be held during August 3-5, 2022. The six-member MPC will begin its meeting from August 3 and will announce the outcome on August 5.
DBS Bank Senior Economist Radhika Rao said in an interview with Bloomberg Television’s Juliette Saly and Yvonne Man on Friday said, "If you take the central bank’s view, the rupee fall is not a concern," adding, "It’s more of inflation focus that’s driving policy rather than what’s happening globally from Fed’s aggressive rate hiking cycle or just the currency."
As of July 8, total reserves are at $580.252 billion. Of the total, foreign currency assets reserves stand at $518.089 billion.
In Rao's opinion, there is room for foreign exchange reserves to fall further as compared to regional peers.
Further, in the interview, Rao said the room for further interest-rate hikes of as much as 110 basis points to bring inflation under the RBI’s target band of 2%-6%, which will take the terminal rate to 6% in this cycle. She added that the idea is that as inflation tapers you leave some real rate in a slight positive trail before they call a close to the rate hiking cycle.
At an event earlier, RBI governor Shaktikanta Das had stated that rates will depend on evolving inflation-growth dynamics. Further, he stated that the central bank won't allow any jerky movements in the currency.