The India rupee, which fell to record a low against the dollar recently, will likely remain under pressure in the coming months, prompting the central bank to keep its policy on hold until late this year, Capital Economics India Economist Aninda Mitra said Monday.
According to the economist, the weakness of the currency has been complicating the policy outlook, and rate cults would return to the policy agenda by the year-end, and then only if global market sentiment stabilized.
Capital Economics noted that the risks are tilted towards further declines in the currency, with India's rising current account deficit making the rupee particularly vulnerable to shifts in market sentiment.
Nevertheless, the firm expects that the current account deficit is likely to narrow over the year or two ahead, with the weakness of the economy slowing down imports. Also, the recent increase in tariffs on gold imports may help at the margin.
According to Mitra, the depreciation of the rupee will continue to push up import prices, and in case of a 'sudden stop' in inflows from abroad the economy will be forced to undergo an abrupt adjustment in domestic demand.
The Reserve Bank of India kept its main interest rate unchanged at 7.25 percent at today's meeting as growing concern about the rupee's decline and lingering worries about inflation outweighed the weak economic outlook.
The central bank is expected to wait for inflation to fall further before engaging in further monetary easing.
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