Currency Crushed If You Don’t Toe Fed Line: Kotak

(This story originally appeared in on Jul 20, 2022)

MUMBAI: In an indirect call for an interest rate hike, veteran banker Uday Kotak has sounded caution over central banks not following the US Fed in monetary measures. Kotak said that those who have gone out of line had faced severe depreciation.

“Central bankers globally move in a herd led by ringmaster in the US Fed. Whether easy or tight money. Go out of line, and your currency is crushed,” said Kotak in a post on a microblogging platform. “Look at Japan, a 30% plus depreciation. That’s the power of the US dollar — the most sought-after asset in the world today. How long?” he added.

In 2022, the US Fed has hiked rates by 150 basis points (100bps = 1 percentage point). The RBI hiked rates by 40bps in May. It followed by another 50bps in June, and is seen to be lagging the US Fed on rate hikes. Kotak’s comment came soon after the currency breached the 80 barrier for the first time and is being seen as a call for increasing policy rates. He is echoing the views of several economists who feel that the RBI cannot afford to allow the spread between interest rates in India and the US to widen despite inflation appearing to have peaked domestically. Besides reducing demand to curb inflation, higher rates also increase the attractiveness of Indian bond investments and help attract dollars.

Last month, after the RBI’s 50bps increase in interest rates, Kotak had said that there was a need to watch liquidity.