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Indonesia and Brazil Raise Rates, Will India Follow?

In what seems to be a mechanism to fight the outflow of money, Indonesia has raised interest rates by 0.5%. The new rate is now 7%.

Brazil on the other hand is fighting inflation and has raised rates to 9%. They even say they are likely to raise to 9.75% by the end of the year. And inflation in Brazil is 6.15% against their target of 6.5%.

India’s inflation rate (CPI) is nearly 10%. WPI is around 5% but has risen in July, and due to the currency depreciation, is likely to rise further in September, past the 5% mark.

The new RBI governor has his first macro-economic policy statement in the end of October, around the time of Diwali. Will this Diwali bring us a rise in interest rates? Or will we act before that, to stem the flow of dollars out?

Remember that earlier, our tweaking interest rates was feared to create an impact on the dollar exchange rate. That didn’t make sense because we didn’t allow foreign investors to invest easily in our government debt or hedge out the currency impact. Given that some of those restrictions have been eased now (though many remain) and hedging is possible, it is much more likely that a change in rates will help ease exchange rate issues.

But alongside we need to give foreign residents more freedom – buy debt “on tap” rather than get FII limits in auctions, allow individuals (not just NRIs) to buy debt through mutual funds and hedge and so on.

Raising interest rates will signal a completely different concept from Operation Knicker-Twist, which involves raising short term rates but keeping long term rates low, and which I believe will fail. But at this time, we have to actually signal raising rates – not to attract foreign capital, but to control inflation.

  • Leo says:

    IT DOESNT MATTER coz rates will rise globally and india will have painful adjustment.
    RBI governor accepted that what the govt was doing .Inflation is mind boggling .CLEARLY the currency says we are on the edge now of a complete meltdown.STOCK MKTS can be rigged as we have seen before but not currencies.Govts always spend but dont care how the money comes in .
    expect rates on 10 year to shoot up to 14 15%

  • D Rama says:

    RBI will *NOT* raise interest rates. Rest assured, banks balance sheets will be kept spic and span and not sullied even one bit. If anything, interest rates may be further reduced by RBI citing low growth. Or even some jugglery like increasing the MSF window to 1 lk Cr and keeping operation knicker-twist intact, and giving more free profit to the banks. Inflation will go out of control, but the published numbers will be distorted beyond belief to ensure a low interest rate regime.

    • Gold Bug says:

      I don’t agree. We will pass through a brief period of deflation before interest rates are lowered.
      We just had stagflation and it is getting into deflation which will be followed by recovery.

  • mangoman says:

    I agree with D.Rama.
    Now it all depends on Raghu. Will be become chamcha or will he be a man, we need to wait and see

  • Leo says:

    RBI will be forced to raise rates coz the debts are blowing up globally and rajan coming it will be a mess

  • Leo says:

    it defines what is deflation … are housing prices crashing .???
    wpi ?no
    again rates didnt shoot up coz tightening was required by RBi it is just globally it is rising at a fast clip
    imagine 5,8% US 10 year … do u really think the Indian G sec will hold any ground at that point …. it will be unstoppable at that point … 3% US 10 note cross it should be on fire lets see next month will be very interesting

  • Gold Bug says:

    US 10Y at 5.8 looks very difficult. China and Japan will hold US bonds for a long time for their competitive advantage and their trade surplus.
    India will be forced into austerity drive to bring down trade deficit to remain competitive. This will affect consumption and demand which
    will cause recession or mild deflation or disinflation (whatever term you may choose). This may affect stocks but bonds rates could hover around these levels, notwithstanding that for a brief period rates could shoot up.