India may be next to hike rates after Indonesia

Central bank may take steps to calm nerves amid an emerging-market rout

All eyes are on India’s central bank to see if it will follow Indonesia in raising interest rates to help calm financial markets amid an emergingmarket rout.

Both countries are part of the so-called “Fragile Five” club — economies that are heavily reliant on foreign inflows and vulnerable to rising US interest rates — and are coming under strain as investors dump bonds and stocks and currencies weaken.

With Bank Indonesia raising Bonds in both countries have faced a sell-off, with investors pulling out $3.3 billion (Dh12.1 billion) this year from India’s market. But unlike Indonesia, investors are actually net buyers of stocks this year.

The outflows have contributed to declines in India’s rupee, Asia’s worst performer this year, and rendered ineffective a series of measures taken by authorities to revive bond demand. While the Reserve Bank of India has intervened through bond purchases, sentiment is dour. Its intervention in the foreign exchange market is tightening liquidity in the banking system and driving up borrowing costs. interest rates on Thursday and pledging to take strong action to restore confidence in financial markets, more economists are betting the Reserve Bank of India will do the same, possibly as early as its next policy decision on June 6.

“As our Asian neighbours have shown, signalling an end to the accommodative stance may be required to contain financial stability risks,” said Priyanka Kishore, lead Asia economist at Oxford Economics Ltd in Singapore. “The implications of a prolonged pause in an environment of rising global rates cannot be completely ignored.”

Here are some strikingly similar developments between the two countries that suggest why India may follow suit:

Both countries run sizeable trade deficits, which make them more reliant on foreign flows to help finance import needs. Indonesia posted its biggest trade gap in four years in April, while in India, which is the world’s third-largest oil consumer, rising crude prices will widen the shortfall.

Analysts at Rabobank International led by senior economist Hugo Erken have calculated that if India ceases to attract substantial investment in equities and securities, the country could be looking at a shortfall of $19 billion (Dh69.7 billion) this year, with implications for its overall current-account.