 "Steep rupee fall limits scope for rate cuts: Analysts")
The steep fall in rupee in recent weeks is likely to delay the rate-cut cycle by the Reserve Bank as the decline will add to imported inflation, economists from three large foreign brokerages said today.
However, on the positive side, they said the bloodbath on the forex market may prompt the government to usher in more reforms like getting many of the pending bills passed and allowing FDI in many more sectors.
"From a monetary policy perspective, a weakening currency should delay the rate-cutting cycle as financial stability concerns override," Nomura India Chief Economist Sonal Varma said in a report.
Bank of America Merrill Lynch too is of the same opinion, saying though inflation reading has been positive for rate cuts, "the rupee volatility raises near term risk to inflation and to a rate cut this month."
However, Nomura noted the rupee fall has increased the likelihood of another round of reforms by the government."The weakening currency has increased the probability of another round of reforms...Some of the real sector reforms that we think are possible include clarity on gas pricing policy and ensuring coal linkage for power projects."
The government may also raise FDI limits in sectors such as defence, telecom, asset reconstruction companies, private securities, and commodity exchanges among others to attract greater capital inflows, Varma added.
"Moreover, pending Bills reforms (land acquisition; FDI in insurance and pension; companies bill) could be taken up during the monsoon session," Varma added.
BofA-ML also noted retail inflation came in even below our and street expectations, leading to a more positive view on rate cuts but for the rupee which has lost 6% since May.
Nomura, however, pointed out that the rate cut process will only be delayed but not scrapped given the weak growth outlook.
On the impact of cheaper rupee on inflation, the Nomura report said, "given a large share of global commodities in the headline inflation basket (around 35%), a depreciating rupee will add to imported inflation pressures."
However, on the positive side, they said the bloodbath on the forex market may prompt the government to usher in more reforms like getting many of the pending bills passed and allowing FDI in many more sectors.
"From a monetary policy perspective, a weakening currency should delay the rate-cutting cycle as financial stability concerns override," Nomura India Chief Economist Sonal Varma said in a report.
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British brokerage Barclays also said that though it maintains a tactical long rupee-dollar position, there are "doubts over the RBI's ability to lower rates at the upcoming meeting on Monday, despite weak growth".
Bank of America Merrill Lynch too is of the same opinion, saying though inflation reading has been positive for rate cuts, "the rupee volatility raises near term risk to inflation and to a rate cut this month."
However, Nomura noted the rupee fall has increased the likelihood of another round of reforms by the government."The weakening currency has increased the probability of another round of reforms...Some of the real sector reforms that we think are possible include clarity on gas pricing policy and ensuring coal linkage for power projects."
The government may also raise FDI limits in sectors such as defence, telecom, asset reconstruction companies, private securities, and commodity exchanges among others to attract greater capital inflows, Varma added.
"Moreover, pending Bills reforms (land acquisition; FDI in insurance and pension; companies bill) could be taken up during the monsoon session," Varma added.
BofA-ML also noted retail inflation came in even below our and street expectations, leading to a more positive view on rate cuts but for the rupee which has lost 6% since May.
Nomura, however, pointed out that the rate cut process will only be delayed but not scrapped given the weak growth outlook.
On the impact of cheaper rupee on inflation, the Nomura report said, "given a large share of global commodities in the headline inflation basket (around 35%), a depreciating rupee will add to imported inflation pressures."