Steven O’Hanlon, Head of Fixed Income at ACPI Investment Managers comments on the latest RBI figures…
The Reserve Bank of India (RBI) is to tighten domestic market liquidity through various measures including capping the amount of liquidity available at the repo rate, and conducting open market operations.
The upshot of this is higher rates across the curve, with the view to attracting flows into the bond market and the banking system. Rising Indian interest rates can potentially attract more money into the Indian bond market, whilst simultaneously increasing the cost of ‘shorting’ the Indian rupee, thereby discouraging speculative selling.
With growth currently not strong enough to support a rise in the benchmark repo rate, they have used this as an alternative solution to address the INR depreciation.
Whilst higher rates may curb growth prospects in the short term, over the longer term higher deposit/savings growth will be a positive for India. Over time as the INR stabilizes we feel the RBI will shift its focus back to supporting growth, and will be in a strong position to provide the necessary liquidity to help achieve this.