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RBI rate cut unlikely as Dollar, crude rates rise: Assocham
The Reserve Bank of India is unlikely to cut interest rates despite the India Inc’s wish, given continuous pressure on the rupee and other global factors impacting it, industry lobby Assocham said.
“The prospects for cut in the policy interest rates by the Reserve Bank of India (RBI) may be adversely affected by continuous pressure on the rupee against the dollar, firming of the US interest rates along with the hardening of the crude oil prices,” said a statement by Assocham, citing its study on the unfolding macro economic scenario.
“It is true that there is an ample liquidity in the banking system following demonetisation and lowering of inflation both at the WPI (wholesale price index) and CPI (consumer price) levels, but then this cannot be taken as a normal situation,” it said. “Once the scrapped Rs 500 and Rs 1,000 notes are replaced and fresh currency is injected back into the system fully, the ball game would change. Besides, there are certain commodities like sugar and wheat which are witnessing firming of prices,” it added.
Assocham said the biggest risks were emanating from the sharp strengthening of the US dollar, raking in international money back into the American economy, as seen in the huge outflows, from emerging markets putting pressure on their currencies.
“While India may get consolation from the fact that we are less affected, the fact is we are amongst the largest crude oil importers in the world and net importing country.”
“So, the dollar strengthening has a direct and immediate impact on the country’s overall balance of payment position and would lead to inflation in the medium term,” the statement added.
The US Federal Reserve on Wednesday increased its key interest rate by 25 basis points in the first rate hike in 2016 and just the second in a decade.
It raised rates by 0.25 percentage points to a range of 0.50 per cent and 0.75 per cent.
“We are slowly moving away from a highly beneficial position of low crude oil prices and a stable and strong rupee which made the landed cost of energy quite cheap,” Assocham President Sunil Kanoria said in the statement.
“This has helped the government finances as also benefited the consumers,” he said.
“Now, we are getting into the reverse position where crude oil is firming up and rupee is becoming weaker,” he added.