RBI Credit Policy

Tomorrow RBI will reveal new tricks in its credit policy. Big changes are expected on the back of Friday’s inflation numbers which showed the WPI increasing above 6% from the expected 5.8% level. The USD/Rupee rates have touched new lows. At current levels many exporters are asking for measures from the government to appreciate the Rupee. Already the Government had taken measures like increasing the CCR and the Repo Rates. Leading to liquidity problems for rupee and huge appreciation of the currency.

UK recently touched its peak of 2 USD for a GBP. This was also triggered by the increase in the interest rates by the BoE. In India it is widely expected that there will be a slight rate hike (around 50 basis points) combined with some regulatory changes. To some extent the large FII inflow is also responsible for the appreciation of Rupee, to arrest this at-least temporarily the government can come up with measures like putting roadblocks to investment in highly speculative sectors like infrastructure. Another thing they can do is imposing some sort of tax on FII investments.

There is a paradox developing here for the RBI and Indian government. On one hand appreciation of Rupee is hurting the exporters. At the same time the appreciation is lowering the prices of the imports of the country, bringing some relief to the inflation levels.

Overall in recent past it can be seen that with appreciation of Rupee there is an increase in the Stock markets. But stringent policy of the government to cut FII investment could have melt down affect on the markets.