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Falling Indian rupee may spook rate cut hopes, says State Bank of India

The continued weakening of the rupee driven by external factors is likely to delay any interest rate cut by the RBI.

Falling Indian rupee may spook rate cut hopes, says State Bank of India

The continued weakening of the rupee driven by external factors is likely to delay any interest rate cut by the Reserve Bank of India (RBI), according to a survey.

“We believe that prolonged weakening of the rupee may delay any interest rate cut by the RBI,” says a research report from the nation’s largest lender SBI.

However, it added, the good thing is that the rupee may rebound sooner, as the current account deficit (CAD) continues to look comforting this fiscal.

The lower crude oil prices have put the country at a very comfortable position and eased pressures from the balance of payment account.

“As per our projections, in normal scenario, total imports are expected to reach USD 483.4 billion in FY15, 3.7 per cent higher than FY14,” the report authored by the bank’s chief economist Soumyakanti Ghosh said.

The impact of easing crude prices on the country’s total oil import bill, Ceteris paribus, may give relief as much as USD 22 billion, it said.

However, if the recent trend in high gold import continues for the next four months, gold import bill would reach USD 31.0 billion in FY15, 7.6 per cent higher than last year, which would add up an additional burden of USD 10 billion to the import bill, the report added.

The external factors that may have negative impact on the macroeconomy include the declining crude oil prices, weakness in the Chinese economy and a likely sudden hike in interest rate by Russia to arrest the bleeding rouble, the report said, adding that these problems are affecting emerging markets and have also renewed concern on the global economic front.

Therefore, if this episodes gain further momentum emerging market currencies may come under pressure as certain European banks have sizable exposure to Russia. This may also put in peril the growth prospects of the global economy in 2015.

“We thus believe a prolonged weakness in the rouble may aggravate the slide in currencies of emerging markets, including the rupee,” the report concluded.

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First published on: 17-12-2014 at 20:26 IST
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