Stage set for another interest rate hike by Reserve Bank of India

New Delhi, May 14

Despite the fact that the borrowings by the Centre and states will become more expensive, the stage has been set for an interest rate hike by RBI next month as three crucial indicators have remained stubborn to change.

Added to inflation remaining above the RBI’s upper tolerance band of six per cent since January this year, latest figures showed that India’s foreign exchange (forex) reserves continued to decline for nine consecutive weeks. They have now touched $595.95 billion, the lowest in the past 12 months.

Another set of figures showed that despite the 0.40 basis points in hike on May 4 in the repo rate – at which the RBI lends to banks – foreign financial institutions (FII) remained net sellers. This month, till May 13, FII sold shares and securities worth Rs 1 lakh crore and bought 63,000 crore worth of shares, thus remaining net sellers of about Rs 37,000 crore. FIIs are getting attracted by the hike in interest rates in developed countries, especially the US, to contain domestic inflation.

As on May 13, forex reserves fell by $1.77 billion as against a fall of $2.695 billion. The major reason was a decline in foreign currency assets by $1.97 billion and a marginal decline in India’s reserve position in the IMF. The increases in gold reserves by $135 million and Special Drawing Rights (SDRs) by $70 million were inadequate to cover up the fall in foreign currency assets.