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US downgraded: Should you worry?

business Updated: Aug 09, 2011 08:08 IST
Sachin Kumar
Sachin Kumar

There is some kindness amid the crisis.

The Reserve Bank of India, which has effected 11 interest rate hikes in 16 months, may spare us in its next monetary policy review due in September as global uncertainties have heightened a slowdown risk in India.

The policy rate has gained 3.25 percentage points since March 2010 as the RBI sustained a war on high inflation. The repo, the rate which commercial banks borrow from the central bank, is now at 8%.

The Reserve Bank said it was keenly monitoring developments on foreign exchange availability and macroeconomic stability in statement early on Monday as it moved to calm market sentiments after the US lost its highest AAA grade in a review by rating agency Standard & Poor’s.

“We will respond quickly and appropriately to the evolving situation,” the regulator said as the rupee weakened to R45 to the US dollar.

With $300 billion in foreign exchange, India’s external management has elbow room.

RBI said its priority is to ensure that adequate rupee and forex liquidity are maintained in domestic markets to prevent excessive volatility in interest rates and exchange rates as it said the developments will have “limited impact” on India.

Experts believe that central bank’s decision on rates will depend on the commodity prices, especially the movement in the prices of crude oil.

“The likelihood of strong hike in the repo rate by RBI in the next monetary policy review is less,” said DK Joshi, chief economist, Crisil. “If commodity prices continue to fall in near future, the RBI may not even hike the repo rate,” he added.

RBI could take hope in the logic that a global dip in economic growth arising from the US crisis will lead to a decline in commodity prices, especially that of crude oil, which in turn could cool inflation in India.

“Crude oil prices are expected to correct in near term as the demand for crude oil is expected to be subdued mainly due to less demand from developed economies due to slowdown,” said commodities analyst Atul Shah at Emkay Global Financial Services.