Battered Rupee May See Some Respite: Bank of America

Pressure on the rupee, which is down over 2 per cent against the dollar since the start of the year, is likely to ease, says Jayesh Mehta, country treasurer at Bank of America.

The markets are now expecting a much slower pace of rate hikes from the Federal Reserve this year, he said. Mr Mehta's comments come after a top Fed official on Wednesday said financial conditions have tightened considerably in the weeks since the US central bank raised interest rates in December last year in its first rate increase in nearly a decade. In addition, the weakening outlook for the global economy and any further strengthening of the dollar could have "significant consequences" for the health of the US economy, said New York Fed President William Dudley.

Mr Mehta of Bank of America said the market may be looking at one hike, instead of three, from the Fed this year. "The pressure for multiple rate hikes from Fed is getting reduced," he said.

The emerging market currencies, including rupee, may see some respite, he said. The rupee has been under pressure since the beginning of the year on expectations of further rate hikes from the Fed and outflows from Indian equity markets in the wake of global equity selloff. The Indian currency had closed 10 paise weaker on Friday at 67.64/dollar.

Budget expectations

Mr Mehta suggests that the government should take advantage of the lower commodity prices to increase infrastructure spending - even if it results in some slippage of fiscal deficit.

"Global commodity prices are low. We need a large infra spend. Maybe if we go a little bit leeway on the fiscal side and spend on infra," he said.

Next RBI move

Mr Mehta said that Reserve Bank Governor Raghuram Rajan could surprise with a rate cut after the budget this year, acting in a similar fashion as the central bank chief had done last year.

Four days after the presentation of the union budget 2015, the RBI chief last year in a surprise move had reduced the repo rate by 25 basis points.

Though RBI kept its rates steady in its policy review on Tuesday, Dr Rajan said the central bank would stay "accommodative" but would look forward to the government's budget on February 29.

"A lot of onus is on the government on prudent fiscal," Mr Mehta said, referring to the RBI's policy stance.

However, "the RBI would not be just watching whether the government sticks to the fiscal deficit goal of 3.5 per cent", he said. "It is the quality of spend will matter...if it is more on the productive side, capex side of situation rather than the extra money going into subsidies."