Nomura economists have stated that the Reserve Bank of India (RBI) is unlikely to raise the policy rate in response to a weaker currency. They believe that the bar for the RBI to hike rates is high as it primarily focuses on flexible inflation targeting and will use other tools to mitigate risks. The economists also pointed out subdued rural demand and a recovery in private capex as reasons for no further rate hikes from the central bank.
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India finds itself at a critical point as its interest rate differential with the US has notably narrowed (see Figures 1 & 2 wherein government bond yields have been used as proxies for interest rates). This tight spot has left the Reserve Bank of India (RBI) facing a tough decision - whether to align with global peers and raise its repo rate or opt for a differing path
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