Amy Yuan Zhuang, Chief Asia Analyst at Nordea Markets, suggests that the RBI’s efforts to solve the bad debt problem of Indian economy are also complicated by the weakening INR this year.
Key Quotes
“The bank is facing the dilemma of either raising rates to support the struggling currency or easing liquidity to ensure banking stability. So far it seems that the RBI has chosen the former. It has raised rates twice this year and only injected liquidity indirectly.”
“The INR has recovered from its all-time low in early October, thanks to plunging oil prices that relieve the pressure on India’s current account deficit. However, India’s external vulnerability remains a possible trigger for another around of INR sell-offs. Prolonged banking sector problems and liquidity squeeze hurt confidence in the INR and adds to the downside risk.”
“On a longer horizon, a persistently high NPL ratio will reduce growth in lending and investment. The resulting lower growth limits the room for a stronger INR in the long term.”
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