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India: The RBI’s Dilemma
- As expected, the Reserve Bank of India left monetary policy unchanged in the July meeting.
- The RBI is temporarily caught (their own wording) in a situation that prevents further easing of the key interest rates, and could lead to further tightening in the overnight market, with an eventual spillover into lending rates possible and a damaging effect on the modest recovery that seems likely down the road.
- As for the rupee, it is unlikely that RBI actions can provide more than temporary (and eventually, costly) relief. As long as the growth outlook remains poor, and global markets digest the consequences of the U.S. Fed’s expected actions, monetary tightening by the RBI will be of little help.