Mexico and India: Central banks will raise rates further, exchange rate contrasts
2022-10-04
■ The Central Bank of Mexico raised interest rates 11 times consecutively and the Central Bank of India raised rates for 4 times consecutively; both of them plan to raise rates further.
■ The exchange rate movements of the two countries have been in stark contrast recently, with the difference in their positions on energy resources has been a dividing line.
In September, many central banks except Japan, including developed and emerging countries all raised interest rates. This article focuses specifically on India and Mexico, two emerging countries whose central banks held policy meetings in late September. According to this, a brief summary of the trends in this two currencies is provided.
Both central banks decided to raise interest rates again at their September policy meetings.The Central Bank of Mexico raised interest rates 11 times consecutively and the Central Bank of India raised rates for 4 times consecutively. This brings the policy rate in Mexico to 9.25% and in India to 5.90%. Upward price pressures remain high in both countries, with annual CPI growth in August at 8.70% in Mexico and 7.00% in India, both above the Central Bank's target range (Mexico: 2-4%/year/India: 2-6%/year). In the financial markets, both central banks still have the ability to raise interest rates again, and it is widely expected that the Bank of Mexico and the Bank of India will continue to raise their policy rates to 10.0% and 6.5%, respectively, by the end of the year.
At the same time, the exchange rate developments in these two countries are in stark contrast. Many emerging countries' currencies have weakened against the backdrop of a stronger U.S. dollar, while the Indian rupee is at an all-time low against the U.S. dollar. Although the Central Bank of India continues to intervene by selling dollars and buying rupees, the rupee has weakened about 10% from a low of $74 late last year to a high of $81. In contrast, the Mexican peso remained relatively stable, appreciating slightly against the dollar to 20.1 pesos from a low of 20.4 pesos at the end of last year.
The background to the price movements of the two currencies is currently considered to be the difference between "energy importers" and "energy exporters". While India has some of the world's largest reserves of mineral resources, such as iron ore and bauxite, it is the third largest importer of crude oil in the world (as of 2021), making it highly dependent on energy resource imports. Recently, the country is thought to have increased its imports of Russian oil, but the current account has been in deficit since July-September of last year. In contrast, Mexico is the 11th largest producer (ibid.) and 14th largest exporter (ibid.) of crude oil in the world, is self-sufficient in energy and benefits from higher energy prices. In addition, as its neighboring country, the United States, is its largest trading partner, the resilience of the U.S. economy is a positive factor for the peso. However, the price of North Sea Brent futures softened to the $83 level in late September for the first time since January of this year. It should be noted that the impact of energy prices on emerging market currencies is changing.