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On 13 June, India’s rupee fell to a record low 78.285 against the dollar and the benchmark S&P BSE Sensex stock index dropped 2.7 percent as investors dumped riskier holdings on the chance that the U.S. Federal Reserve will raise interest rates this week more than the half-point that has been expected, Bloomberg reported.
Investors have pulled about $24 billion out of India’s stock market so far this year.
However, India’s central bank holds almost $600 billion in foreign currency reserves, which it has been wielding to smooth out the rupee’s volatility. With the bank’s intervention, the rupee closed Monday at 78.0387.
“It’s natural for emerging-market currencies to weaken during risk-off,” Churchil Bhatt, vice president of Kotak Mahindra Life Insurance Co., told Bloomberg. “While the Reserve Bank of India has sufficient reserves to manage any undue volatility, the rupee may be expected to move in line with its Asian peers.
The rupee will sink toward 80 to the dollar in an “orderly depreciation,” he predicted.
Prices for government bonds also slumped, driving up the 10-year bond’s yield 10 basis points to 7.62 percent.
“Today’s move in Indian bonds has more to do with Fed rate-hike expectations, but if India’s inflation is higher, you could see a much worse impact,” Madhavi Arora, lead economist at Emkay Global Financial Services, said to Bloomberg.
India’s budget deficit is growing as global prices for food and fossil fuels rise relentlessly. The country’s inflation rate in April set a record at 7.7 percent, the National Statistics Office reported.
TREND FORECAST: India has joined the global Deflation club. Today the State Bank of India raised interest rates on some retail domestic term deposits by 15 to 20 basis points. The interest rates were raised on deposits of below Rs 2 score. As reported by Financial Express, the revised interest rates will come into effect from June 14, according to information on the website of the lender.
Thus, the higher interest rates rise, the deeper the economy will fall. And with India’s oil import dependence from foreign sources at 85.5 percent and oil prices rapidly rising, Dragflation will hit the nation by year’s end.