RBI Policy In order to ensure stability, the Reserve Bank of India’s Monetary Policy Committee (MPC) decided on Friday to leave the policy repo rate at its present level of 6.5 percent.
It’s a turning pitch, and I would like to play my shots very carefully, RBI Governor Shaktikanta Das said in reference to liquidity in the system.
Can we say the same about the current global conditions that could potentially drive India’s inflation RBI Policy through currency depreciation or imported inflation channels?
The RBI is now confronted with a fresh set of international challenges after dealing with domestic inflation. These include a steady increase in the value of the US dollar without any discernible pattern, an increase in the yield on 10-year bonds, and withdrawals from foreign portfolio investments (FPIs).
Inflation will need to be managed in the face of global problems by balancing the need to support economic expansion with reducing it. Let’s examine the issues facing the world today:
steadily rising dollar
The value of the US dollar against a basket of other currencies is measured by the US Dollar Index (USDX), which is rising. It increased from approximately 100 at the beginning of August to about 106 this month during the previous two months. This shows that the US dollar is getting stronger versus the world’s major currencies. The US Federal Reserve has hinted that there would be another increase in its benchmark interest rates, which could be one of the causes. Short-term interest rates are currently at a 22-year high. Additionally helping is the US political unrest, which draws investors to safe-haven assets like the US dollar.
Growing 10-Year Bond Yield Consistently
The yield on US 10-year bonds has been steadily increasing in recent months, hitting a 16-year high of 4.73 percent on September 21. In actuality, the 10-year bond rate has risen by 20 basis points since the August decision. At the beginning of August, it was 4.04, and on October 5, it closed at 4.88. A potential rise in high yields is influenced by the US’s high long-term interest rates as well as potential problems from expanding national debt. The Bond King and co-founder of PIMCO, Bill Gross, projected that the yield on the US 10-year Treasury might rise to 5% soon. One of the biggest investment management companies in the world, PIMCO is renowned for its knowledge of the bond market. Similar forecasts have been made by US fund managers Bill Ackman and Larry Fink, who believe that the yield on US Treasuries may soon surpass the 5 percent threshold.
Lowered Oil Prices
Oil price changes have caused some unease, as evidenced by the surge in Brent crude prices from roughly $85.34 per barrel in August policy to high levels of $95–96 per barrel by the end of September. RBI Policy However, the costs somewhat decreased to $85.19 in the first week of October. Major oil producers Saudi Arabia and Russia have really chosen to maintain their voluntary production limits, which may have an impact on prices. However, due to prolonged oil supply limits, there is also a chance that the world economy could suffer.
CAD Threat in RBI PolicyÂ
So far, the trade imbalance does not seem promising. The trade deficit was $37.49 billion in the first five months of 23–24, compared to $60 billion in the same time last year. Only June’s worth of data is available for the Current Account Deficit (CAD). The CAD was less than anticipated in the first quarter of 2023–24 (April to June), at 1.1 percent of GDP. This represents a sharp decrease from the 2.1 percent of the GDP in the same quarter a year prior. The rising price of crude oil offers some hope for significant changes in the circumstance for the remaining fiscal year. Given the impact on exports from high crude oil prices and decreased exports as a result of the global recession and rupee depriciation.
Outflow of FII
Equities and debt in India both had negative foreign portfolio investments (FPI) in September and October. FPIs sold Rs 13,810 crore in September and Rs 5,834 crore in the first week of October for the first time in 2023. The dollar index has increased as a result of higher bond yields and a strong dollar.
Dollar Appreciation in RBI Policy
The value of the rupee against the US dollar has decreased by almost 50 paise since the August decision regarding . The rupee was approximately 82.73 in August, and as of October, it is presently only 83.24. The US dollar is gaining and having a major influence on the rupee because more money is coming in than is leaving.
Foreign Exchange Reserves are declining
In September 2021, foreign exchange reserves reached an all-time high of $642 billion. Since then, they have been falling. As of September 22, the foreign exchange reserve was valued at $590 billion. The reserve was $603 billion when the monetary policy was unveiled in August. The RBI frequently intervenes in the foreign exchange market to lower high volatility. If the dollar gains and crude oil prices climb, such intervention might cause the CAD to rise.
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