Looks like the Indian Rupee is getting stronger

Not only is the Australian dollar strengthening against the US dollar, it looks like everything except the Canadian loonie is too!

Excerpt from today’s daily pfenning…

Ashish Advani, the Head of Corporate FX here at EverBank, pointed out yesterday that India had split their two interest rates yesterday. Here is what Ashish pointed out to us after the rate announcement:

Reserve Bank of India (RBI) managed to completely surprise markets by raising repurchase rate (rate at which market borrows from RBI in a liquidity deficit situation) by 25 basis points to 7.25% while leaving the benchmark reverse repo rate unchanged. We were expecting a hike in both repo as well as reverse repo rate by 25 basis points each.

Why has RBI done this?

To balance out the risks of global deceleration with the risk of demand side inflationary pressures thawing domestic growth. With the global growth environment turning more uncertain and US economy showing signs of deceleration, the risk remains that excessive monetary tightening domestically could impact domestic growth. However, with domestic price pressures rising RBI cannot afford to sit on the sidelines and let inflation go beyond the tolerance band of 5-5.5%. RBI clearly recognizes the risk that India could be entering the overheating zone and asset price inflation too could hurt the real sector. Hence the RBI chooses to signal potential for higher rates by raising the repo rate but should growth outlook reverse dramatically impact on domestic economy is marginal. Also another signal, in our assessment is, should banks face tight liquidity conditions, the overall borrowing costs increases, thus the cost of money goes up in a situation of banks over extending credit.

Thanks to Ashish for bringing us all up to date on this unusual move by the Indian Central bank. This partial increase in the interest rates have caused the Indian Rupee to rally, increasing by almost .4% yesterday.

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