Volatility in the Asian markets has risen considerably and accordingly there is a need for tighter monetary as well as fiscal policies, says a DBS report.
According to the global financial services major, trade friction and geopolitical tension have pushed up emerging market volatility, with India and Indonesia under the most acute pressure in Asia.
The rupee weakened past 69 per dollar to a record low on Thursday, while the Indonesian rupiah has slipped swiftly past the 14,200 per dollar mark.
"As the regional under performer, the rupee is down 7.4 per cent on 2018 year-to-date basis and rupiah down more than 5 per cent," the report said adding there is a need for tighter monetary and fiscal policies.
As per the report, the respective central banks of India and Indonesia will turn sensitive to capital outflows and financial stability.
"We reckon that the respective central banks will turn sensitive to the outsized risk from capital outflows and financial stability, irrespective of the outright inflation targeting mandate," Radhika Rao, Economist India, DBS Bank said in a research note.
For India, the Reserve Bank of India set the ball rolling with a 25 bps hike in June, and chances of a follow-up rate hike in August remain high, the DBS report noted. The central bank had upped its retail inflation projection by 0.30 per cent.
Factors like oil prices, core inflation, weaker start to the monsoon and upcoming minimum support price announcement threaten to harden inflationary pressures.
"These along with global risk factors (weak rupee, a more confident US Fed and US-China trade spat) are likely to keep RBI cautious in August and rest of the year," the report said adding that risks of another 25-50 bps hikes beyond August are high in rest of this fiscal.
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