Rate hike in tune with global trend to back rupee

While the 25 basis point hike in repo rate by the monetary policy committee came as a big surprise for a majority of market participants, a few had a whiff about the likely move in view of the recent pre- emptive action taken by some of the Asian central bankers to maintain macro- economic stability.

The recent surge in global crude oil prices, sharp depreciation in the currency against the US dollar and the prospects of higher interest rate in the US has threatened the macro- economic stability of many emerging market economies.

“The Reserve Bank of India’s move does not come as a surprise, against the background of other Asian policymakers also erring on the side of caution. Pre- emptive policy tightening is preferable over reactive policy changes. Investors have become sensitive to economies that face overheating risks, characterised by twin deficits and high inflation, that could potentially unsettle macroeconomic stability,” said Radhika Rao, India Economist at DBS Bank.

According to her, the Philippine central bank defended the peso from strong depreciation pressures by raising the benchmark rate by 25 basis point in April, with the consensus pricing in another 25 basis point hike this year. Indonesia also faced similar pressure, with the currency facing the heat from strong foreign debt outflows and rising bond yields.

“With rupiah ( Indonesian currency) stability as the mandate, new Bank Indonesia ( BI) Governor Perry Warjiyo voted to frontload policy tightening by raising the benchmark rate twice in May,” she added.

On a similar note, Rajeev Radhakrishnan, head of fixed income at SBI Mutual Fund said preemptive rate hike seems more in response to financial market stability concerns in the context of incremental portfolio outflows, rupee weakness, up move in crude prices as well as the policy rate actions by other emerging market central banks recently.

Pre- emptive rate hike seems more in response to financial market stability concerns in the context of incremental portfolio outflows, rupee weakness, up move in crude prices. — RAJEEV RADHAKRISHNAN, Head, FI, SBI MF