The sharp fall in the rupee against the US dollar has made life difficult for RBI Governor D. Subbarao. The local currency has depreciated nearly 10 per cent since the beginning of this fiscal.
In this backdrop, the RBI Governor had to take several measures including reversing the monetary easing stance.
While the Street expects additional tightening measures on July 30, Prime Minister Manmohan Singh has now sought to calm the nerves of market participants by saying the recent measures could be temporary.
Overall, the RBI seems to be inclined to go in the direction of tightening, but India Inc hopes the RBI Governor will stand still.
Very few are in the camp that see RBI cutting policy rates in the near term.
The recent RBI measures that made additional borrowing from the central banks expensive has put some banks in a quandary.
Prior to the RBI measures, some banks had gone in for base rate cuts, following Finance Minister P Chidambaram’s advice.
They now face a double whammy and some are taking it on the chin by enduring lower profit margins.
Faced with increased uncertainties in the markets, some public sector banks have decided to wait till July 30 before taking a call on base rates.
Some banks have even put their earlier decision to reduce base rates on hold.
So why is the local currency weakening against the greenback? The main reason, according to economy watchers, is that it is more to do with dollar strengthening than rupee weakening.
Ben Bernanke’s remarks on tapering of bond purchases have stirred the global markets, sending many emerging economy currencies into a tailspin.
So although inflation is on a downward trend, don’t expect RBI to come up with another policy rate cut on July 30.