Daijiworld Media Network - Mumbai
Mumbai, May 22: The Reserve Bank of India (RBI) is reportedly not in favour of raising interest rates as a primary tool to defend the weakening rupee, with policymakers continuing to prioritise inflation and economic growth over aggressive currency intervention, according to sources familiar with the matter.
The stance comes even as the Indian rupee has fallen nearly six per cent since the Iran conflict escalated in late February and recently touched a record low of around 96.96 against the US dollar.
Sources said the RBI believes there are several alternative measures available to stabilise the currency instead of resorting to immediate rate hikes. These reportedly include special dollar deposit schemes for non-resident Indians and possible tax adjustments for debt investors.
Officials indicated that all options remain under consideration in coordination with the central government.
“There doesn’t appear to be any urgent need for the central bank to move towards rate hikes,” one source said.
The reported position places the RBI at odds with financial markets, where traders have been increasingly pricing in monetary tightening. Interest rate swap markets are reportedly factoring in at least 40 basis points of rate hikes over the next three months and over 100 basis points during the next year.
However, RBI officials reportedly believe that small rate hikes may not significantly support the rupee while potentially hurting economic growth in Asia’s third-largest economy.
The central bank has historically avoided using interest rates as the primary instrument for currency defence, except during brief interventions such as the 2013 liquidity tightening measures.
Sources further said the RBI’s growth forecast of 6.9 per cent for the current financial year may also be revised downward amid global uncertainties and rising energy prices.
At the same time, policymakers are closely monitoring inflationary trends. Consumer price inflation, which stood at 3.48 per cent in April, is now reportedly moving closer to five per cent, although it remains within the RBI’s tolerance band of 2-6 per cent.
India’s wholesale inflation rose sharply to 8.3 per cent last month, largely driven by higher oil prices, though the impact on retail consumers has so far remained relatively limited.
Officials are reportedly assessing how quickly rising fuel and import costs could feed into broader consumer inflation before taking further policy decisions.
The RBI’s Monetary Policy Committee is scheduled to announce its next interest rate decision on June 5 after consultations with economists and market experts.