A vendor holds an Indian one hundred rupee banknote at a colored powder market stall ahead of Holi celebrations in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Rupee Weakness Poses a ‘Dilemma’ for India’s Reserve Bank

(Bloomberg) -- A sustained weakness in the rupee may push the Reserve Bank of India to further tighten monetary policy, perhaps as early as next month, JPMorgan Chase and Co.’s chief India economist Sajjid Chinoy said.

“The RBI meeting becomes an interesting dilemma,” Chinoy told Bloomberg Television in an interview on Monday, adding that after two interest rate hikes since June, he, like most in the market, thought the central bank had bought time before the next increase. At the same time, inflation is easing, with headline numbers for August likely to show that the consumer price index rose by less than 4 percent from a year ago, he said.

That easing will bring inflation in line with the central bank’s aim of keeping it at the 4 percent midpoint of its target band. After delivering back-to-back rate hikes to cool price pressures in the world’s fastest-growing major economy, Governor Urjit Patel said there was a rising threat from global trade wars, with potential implications for investment and exports. This led many to believe the rate-setting Monetary Policy Committee will switch to a wait-and-watch mode in coming months.

Read: India May Hold After Two Interest-Rate Hikes, Minutes Show

But the rupee’s rapid fall in August might force the RBI’s hand sooner, Chinoy said. The Indian currency lost 3.5 percent last month and is the worst performer in Asia so far this year, mainly due to worries about a widening current-account deficit. The MPC is scheduled to announce its next decision on Oct. 5.

“The joker in the pack is the currency,” Chinoy said. “We have seen all emerging market current account-deficit countries come under pressure in the last two months despite a weaker dollar index. And if that continues and the RBI is losing reserves at the rapid pace, then the October meeting very much comes into play and the strong GDP print enables that.”

India’s gross domestic product grew 8.2 percent from a year earlier in the three months ended June, the Statistics Ministry said in a statement on Friday, beating the 7.6 percent median estimate in a Bloomberg survey of 42 economists.

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