RBI policy: Here's how macros moved since last rate hike in 2014

Rising global oil prices has made the Reserve Bank of India's job more difficult. With the retail price of petrol and diesel at multi-year highs, inflationary pressure remains the top concern for the central bank.

Globally too, the expectations are that the US Federal Reserve will raise interest rates by a quarter of a percentage point next week as the era of cheap dollars draws to a close . Mirroring the concerns, foreign investors have been selling domestic stocks in the last two months.

The RBI’s monetary policy committee decided to raise interest rates by 25 basis points in Wednesday.

RBI last hiked policy rates in January 2014, almost 4.5 years ago. Let's have a look at how India’s macro-economic indicators have moved since then.

India’s GDP growth has seen various highs and lows during this period. The quarterly GDP growth in the Jan-March quarter 2014 was 5.6%. The growth rate peaked to 9.2% in the Jan-March quarter 2016 and later fell for next five quarters. However, in the quarter ended March 2018, the GDP growth has witnessed a sharp ‘V’ shape recovery by recording a growth rate of 7.7% and retaining the fasted growing economy tag.

Inflation has been relatively higher with CPI inflation being 4.6% in April 2018. Oil prices are increasing and the government is not likely to lower duty rates and with rupee declining, inflation is likely to go up further. Having said that, the current inflation rate is comfortably within the RBI’s target range for FY19. The CPI inflation rate was at its peak. The inflation rate was above 8% for quite a few months during early 2014. It further declined to sub-2% in June 2016, but prices are again under pressure due to rising oil prices and depreciating rupee.

The rupee has been falling almost continuously by almost 3% in the last two months, and also crossed the psychological mark of Rs 68/$. During the last rate hike by RBI in Jan 2014, the rupee was appreciating. The USD/INR exchange rate came down to Rs. 59/$ in May 2014 but started depreciating again and hit the peak rate of Rs. 68.6/$ in June 2016. The exchange rate currently is hovering around late 60s since last three months.

A weaker rupee and rising interest rates in the west has direct impact on India’s FPI inflows as it makes India a less attractive market for foreign portfolio investors (FPI).

FPI’s in India saw positive inflows for two consecutive years - 2013-14, 2014-15.  The year 2015-16 witnessed net outflows but again gained momentum in the two successive fiscal years.

In 2018-19 so far, the depreciating rupee is impacting FPIs flows. FPI’s have been moving out of the country in the last two months despite the limits and tenures of investment for FPIs have been relaxed by the RBI to enable higher flows.

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