The fact that inflation slowed from last month’s annualized 8.62% increase paves the way for the Reserve Bank of India to pause in its recent campaign of interest rate increases — at least until the end of the year, local analysts say.
This would leave Indian benchmark rates at 6.25%, which is still attractive enough to foreign investors to lure capital from the much lower bond yields of the developed world. However, avoiding another rate hike lets Delhi avoid artificially making the rupee more expensive relative to other global currencies; a stronger rupee would only compound the problem faced by countries like Brazil and, increasingly, within India.
In the current economic environment, an overly strong currency can swell a country’s reserves to unhelpful levels while robbing local industry of its global competitiveness. To avoid this kind of situation, several nations have flirted with various schemes for depressing the value of their money: taxing foreign flows of capital into local assets, cutting interest rates or even intervening outright in the currency markets.
The simple absence of interest rate increases on the horizon should help curb the rupee’s recent rise. However, as money floods into rupee-denominated assets, it may only slow the rally into funds like the WisdomTree Dreyfus Indian Rupee Fund ETF (NYSE:ICN):
Beware food inflation numbers coming out from India on Friday.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.