Experts cautioned that a balance in monetary policy has to be struck, to prevent slowing growth and rising inflation.
Inflation, a key concern for India’s central bank, slipped below the 4 percent target in August. It’s affected by currency movements because if the rupee weakens, then foreign goods would cost more in rupee terms — resulting in an increase in prices.
With oil prices weighing on India, if interest rates are hiked and the rupee strengthens, then the cost of imported oil will be less.
Currently, a 10 percent rise in global crude oil prices will lift headline inflation figures by between 20 and 30 basis points according to the RBI, DBS Economist Radhika Rao noted. A rupee that has depreciated by around 5 percent could also prop up inflation, by 20 basis points, she said.
“These reasons will provide sufficient justification to the central bank to tighten policy levers in October,” Rao concluded.
But ANZ’s Mendiratta said that the current inflation level will not be sufficiently compelling for the RBI to raise rates.
“Though the combination of higher oil prices and a weak Rupee have raised concerns on the inflation path, the recent soft readings suggest that the RBI can afford to wait and watch. Stabilising the Rupee by raising interest rates does not seem to be high on the agenda,” he told CNBC.
Mendiratta added that a rate hike is also unlikely because government and corporate bond yields are likely to move higher.
ING’s Sakpal cautioned that the central bank has to strike a balance given that he expects India’s growth to moderate from now until 2019. The country’s GDP growth is expected to go past 7 percent this year, but the downside to raising rates may be a slowdown in economic growth.
“The RBI will have to strike a proper policy balance to prevent slow growth and high inflation trends from intensifying further … Hence, I am not expecting the rupee to budge from its underperforming Asian currency status in the near-term,” he said.