(Bloomberg) -- India's central bank would increase interest rates in response to high consumer prices, and not due to a weaker currency as the rupee looks fairly valued at current levels, according to DBS Bank Ltd.
“If you take the central bank's view, the rupee fall is not a concern,” DBS Bank Senior Economist Radhika Rao said in an interview with Bloomberg Television's Juliette Saly and Yvonne Man on Friday. “It's more of inflation focus that's driving policy rather than what's happening globally from Fed's aggressive rate hiking cycle or just the currency.”
The Reserve Bank of India, which is due to announce its rate decision Aug. 5, has raised borrowing costs by 90 basis points to cool inflation that's surged above target to 7%. The central bank has also depleted its foreign-exchange reserves to $580 billion as part of measures to support the currency hit by a drain in capital amid rising US rates.
Rao said there is room for foreign exchange reserves to fall further as compared to regional peers.
The central bank won't allow any jerky movements in the currency, Governor Shaktikanta Das said at an event Friday, adding the “rates will depend on evolving inflation-growth dynamics.”
Rao sees the room for further interest-rate hikes of as much as 110 basis points to bring inflation under the RBI's target band of 2%-6%, which will take the terminal rate to 6% in this cycle. “The idea is that as inflation tapers you leave some real rate in slight positive trail before they call a close to the rate hiking cycle,” she said.
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