Societe Generale analysts see a 25bp RBI rate hike as possible Friday but note the bank favors FX intervention over tightening to support the INR.
The Reserve Bank of India faces a policy dilemma as the rupee hovers near record lows, with markets pricing a potential 25 basis point rate hike at Friday’s meeting. Regional tightening, including moves by Indonesia and South Korea, has raised expectations for RBI action to curb imported inflation and stabilize the currency.
Recent RBI intervention kept the INR below 95.00, while a record INR2.87tn ($30.1bn) dividend transfer to the government failed to move bond yields, which remain near 7.00%. Analysts suggest the RBI prefers FX operations and dollar inflow measures over rate hikes to avoid raising borrowing costs.
Friday’s GDP data is forecast to show growth moderating to 6.8% year-on-year from 7.8% in the prior quarter, adding to the central bank’s balancing act between inflation control and economic momentum.