ICRA: the rise in key rates in India is less pronounced than in the United States: Icra

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Given the uneven domestic economic recovery and a relatively larger output gap compared to pre-Covid levels, as well as higher inflation tolerance levels, ratings agency ICRA expects that India’s policy rate hike cycle is less deep compared to the US Fed.

Aiming to combat high inflation in the United States, the US central bank recently raised its key rates by 75 basis points, while indicating that further rate hikes are likely in the coming days.

Regarding the rupee currency, the rating agency expects the Indian rupee to trade between 77.0 and 80.0 against the US dollar in the remainder of the first half of FY23 – d September – amid global headwinds, she said in a report.

Currently, the rupee is at 78.23 per US dollar and has recorded several historic lows over the past few days, according to the data.

The RBI’s large foreign exchange reserve is likely to prevent a disorderly depreciation of the national currency, the rating agency said in the report.

Typically, the Reserve Bank of India intervenes in the market through liquidity management, including the sale of dollars from foreign exchange reserves, to prevent a sharp depreciation in the value of the rupee.

Also, regarding government borrowing from the market, he said there had been a significant increase in the post-pandemic period.

“Although they have eased in the revised FY2022 estimate, they are expected to increase quite sharply in FY2023 to reach record highs. In addition, any fiscal slippage could put further pressure on the Indian government market borrowings,” the report said.

That said, he expects interest rates on small savings plans to be raised for the second quarter of FY23, given the sharp increases seen in government bond yields of various mandates, to which these small savings instruments are linked.

In this case, an increase in small savings rates could lead to increased inflows into these schemes, limiting the need for additional market borrowing by the government, he added.

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