As markets jitter from the tumult seen in emerging markets over the last few days, India has made the surprise announcement that it’s raising interest rates in a bid to quell inflation and respond to a vulnerable rupee.
The Reserve Bank of India’s (RBI) has raised the benchmark repo rate - the amount at which it charges to lend to commercial banks - from 7.75 per cent to eight per cent.
This is the third time the major emerging market player has raised rates in six months. Analysts had expected no change after the RBI's Mumbai meeting.
India has said it feels better prepared to combat the risk of major capital outflows tainting the progress of emerging economies.
The bank said that it doesn’t see any near-term need for monetary policy tightening, provided retail inflation eases.
Last week it proposed setting a target of four per cent inflation by 2016.
The country’s main inflation measure, the wholesale price index, increased 6.16 per cent in December from a year previously. While it was a slightly fall on the month before, stubbornly high consumer prices remain a concern for the central bank.
Last year, the rupee lost 11 per cent following the announcement that the US would begin tapering. At pixel time, the rupee is down 0.8 per cent against the dollar.
Of course, today’s announcement comes ahead of tomorrow’s Fed policy meeting where consensus is for a further reduction of the bond buying programme by $10bn.
And India most likely isn’t the only emerging market making changes to rates.
Yesterday Turkey’s central bank suggested a possible interest rate hike, in spite of enduring government opposition. It’s holding an emergency meeting later on today.
Turkey has relied heavily on foreign investment inflows, and flows back to the US have wobbled the lira. At the start of the year, it lost more than five per cent, briefly touching a record low versus the dollar.
In a note this morning, UBS said that the emergency meeting could "reassure markets".
According to a Reuters poll, expectations are for a hike of around 22.5 percentage points- although estimates are wide ranging, from a hike of 12.5 percentage points to more than 35.0 percentage points.
Capital Economics comments:
Monetary policy in Turkey is extremely unpredictable, but our best guess is that the MPC will hike the overnight lending rate, perhaps to 9.0 per cent or more (from 7.75 per cent at present).