Bank Nifty Advances 1% Amid Speculation RBI Will Not Implement Emergency Rate Hike to Support Rupee; AU SFB and Axis Bank Among Notable Gainers

Bank Nifty Rises Over 1% Amid RBI's Reported Decision Against Off-Cycle Rate Hike

On May 22, the Bank Nifty index rose over 1% as a report from CNBC-TV18 suggested that the Reserve Bank of India (RBI) is not considering an off-cycle rate hike to defend the embattled rupee. The top two benchmark stocks by weightage, private lenders HDFC Bank and ICICI Bank, rose 2% each, contributing to the Bank Nifty's 1.2% gain.

At 10:50 am on May 22, Bank Nifty was trading 1.16% higher at 54,057, with Axis Bank and AU Small Finance Bank leading the gains. Despite rising concerns over crude oil prices and pressure on the rupee amid escalating tensions in the Middle East, the RBI appears to be focused on balancing inflation and growth under its flexible inflation-targeting framework.

The RBI's decision against an off-cycle rate hike comes amidst a Bloomberg report on Thursday that suggested the central bank was considering all available options to stabilize the rupee, including interest rate hikes, currency swaps, and raising dollars from investors overseas. Indonesia and the Philippines have raised rates as inflation and currency depreciation risks rise.

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The rupee has fallen nearly 6% since the Iran war began late in February and slumped to a record low of nearly 96.96 per dollar on Thursday. The RBI has historically avoided using interest rates as a primary tool to shore up the rupee, apart from a brief 2013 increase in the marginal standing facility rate.

Comparison of Recent Rate Hikes by RBI and Other Central Banks

The RBI Monetary Policy Committee will announce its next decision on June 5. Interest rate swap markets are pricing in at least 40 basis points of rate hikes by the RBI over the next three months and more than 100 basis points over the next year, according to Reuters. A source told Reuters that a meaningful currency defense would require steep rate increases, warning that smaller moves would have little impact while crimping demand.

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Consumer price index inflation is now trending higher towards 5% or a little above that, a source told Reuters, which is still within the RBI's tolerance band of 2-6% although higher than the 4% target. In April, CPI inflation was at 3.48%. Wholesale inflation surged to 8.3% last month, but it has heavier oil weighting than the CPI basket, and the limited pass-through has softened the impact on consumers.