The slew of worse than expected economic data across the globe, including India, is fanning expectations of further monitory easing everywhere from Japan, China, Europe, the UK to the USA and Brazil.
However intransient, structural inflation in both CPI and WPI is expected to tie RBI’s hands relative to its counterparts in G20. Given that consumer in India has been facing negative real rates since 2004, any further easing will be detrimental to the growth prospects of the country, as savings will continue to be diverted, more prominently, to speculative assets, as real estate, rather than productive investments – a rational response to negative real interest rates.
Hence, it is likely that, on interest rate parity basis, INR may become even more attractive to investors, in spite of a slowing economy.
Also, strong drop in commodity prices, with very slow domestic growth can result in some welcome correction is the size of current account deficits faced by India.
Finally, if RBI keeps its new discipline, acquired last week, of not resorting to OMO’s, the INR can find a short-term bottom. RBI should note that since it became clear on last Thursday (31 May) morning that there will be no OMO on Friday, INR appreciated by nearly 2.5% till Monday (4 June) mid-morning.