Indian Rupee to Remain Supported Thanks to a Proactive RBI

- RBI and BoT provide a good example of emerging market monetary policy

- The Philippines central bank provides an example of the dangers of being 'behind the curve'

- RBI tipped to raise rates again in 2018

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Emerging market currencies find themselves in an unenviable position owing to the ongoing rally in the US Dollar and rising interest rates at the US Federal Reserve; these two forces tend to make life difficult for emerging markets as they 1) push up the cost of USD-denominated debt and 2) push up the cost fuel.

Rising debt repayments and rising fuel costs in turn spell for potential economic slowdown and put domestic currencies at risk of decline which in turn confirms a virtuous cycle of further currency depreciation and economic underperformance.

Ensuring currency stability therefore becomes an important weapon in the toolkit of emerging market central bankers and we are told by analyst Antje Praefcke at Commerzbank the central bankers in India, the Philippines, and Thailand this month provide a good case study of the need for central bankers to "stay vigilant and not fall asleep at the wheel or succumb to political pressures".

Praefcke says two good examples of emerging central bank policy management in the current environment has been provided by the Reserve Bank of India (RBI) and the Bank of Thailand (BoT) while the Philippines central bank (Bangko Sentral ng Philipinas, BSP) "is discovering the consequences of falling badly behind the curve".

Defending the Rupee

The Reserve Bank of India surprised markets on June 6 by raising its base lending rate by 0.25% to 6.25%, citing in part the prospect of rising inflation over coming months.

"The RBI minutes of the 4-6 June policy meeting highlighted that policy makers were pragmatic, adaptable, and determined to stay ahead of the curve," says Praefcke.

The Rupee has fallen, but the damage could be a whole lot worse if it were not for actions at the RBI we are told; "an alert RBI provides a good safety net against an uncontrolled sell-off in INR," says Praefcke.

Indeed, we see USD/INR trading around the 68 - 68.50 mark and there appears to be little desire for the exchange rate to break above this apparent resistance zone, perhaps the worst of the INR sell-off is in fact over?

The GBP/INR exchange rate has meanwhile fallen to current levels at 89.00 since April highs above 94.00 were met and rejected, confirming the Rupee is enjoying strength against other major currencies.

Commerzbank believe there is a strong prospect of another interest rate rise at the RBI in 2018, noting most members of the policy committee maintained a neutral bias due to the risks of higher oil prices, Fed normalisation.

Such a move should support the Rupee further.

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Thailand Keeps the Baht Afloat

The Bank of Thailand has meanwhile kept rates unchanged at 1.5% this month and maintained a neutral bias.

"This is the right thing to do given that inflation continues to hover at the lower end of its 1-4% inflation target. BoT is tolerating a relatively strong THB to mitigate the risks of higher oil prices. THB is down nearly 1% vs USD year-to-date but this is less than the average drop for Asian currencies this year of over 2%," says Praefcke.

Commerzbank look for the USD/THB exchange rate to hold around 32.50-33.00 near term.

Philippines: Doing it Wrong, PHP to Underperform

A third example of emerging market central bank policy making - that conducted by the BSP in the Philippines - is held as an example by Commerzbank of what not to do.

"They delayed hiking rates last year and could be forced into a corner to hike more aggressively to get inflation back under control. BSP hiked for the second consecutive meeting yesterday by 25bp to 3.50%. They could hike by another 25-50bp this year because inflation is already above its 2-4% target," says Praefcke.

Commerzbank expect the PHP to remain an underperformer among Asian currencies with the 54.00 level in sight for USD/PHP.

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