Written by Gavin Kakol, GEI Associate
Despite the continual slow down of the Indian economy, the Reserve Bank of India (RBI) did not change interest rates during the mid-term policy review 
on Monday. Finance Minister Pranab Mukherjee’s reaction to the situation was calm in his statement that inflation may have weighed on the decision and its normally unnecessary to consult the minister during mid-quarter review. The depreciation of the rupee may have been one of many additional factors that may have played a part in the decision.
Markets responded accordingly Monday. The BSE Sensex peaked at 17099.8 before dropping to a low of 16647.52 by 2:15. The index represents 30 large companies in various industrial sectors of the Indian economy.
A number of economists believe interest rate cuts are coming in the near future. Sonal Verma, an economist from the financial service group Nomura, expects a cut in rates after the July 19th presidential election following a month of stagflation.
On Tuesday the Rupee hit a 2 1/2 week low. Traders fear the Rupee could continue to fall to its all time low of 56.52 to the dollar. If this happens the RBI may be prompted to intervene, but that would be problematic because a currency is usually supported by higher interest rates and a slowing economy would call for lower interest. Recently Fitch has joined Standard & Poors to regard India’s future outlook as negative. This is all in midst of eight months of declining manufacturing.
The following graph shows the dramatic 27.6% decline of the rupee against the U.S. dollar over the past eleven months.
Sources:
- Any Cut in Rates to Stoke Inflation (Mayur Shetty,The Times of India, 19 June 2012)
- Unchanged Rates Dissapoint Govt. (The Times of India, 19 June 2012)
- Rupee Falters, record low seen possible (The Times of India, 19 June 2012)
- BSE Sensitive (Yahoo Finance, 20 June 2012)
- India: GDP Slumps, Rupee Declines and Industry Calls for Action (GEI News, 2 June 2012)
