Playing your cards right in the face of Central Bank Activism and conflicting monetary policy in India and Australia
Central banks in India and Australia find themselves pursuing very different strategies in an effort to get a grip on inflation, employment and economic growth. With this in mind, Natasha Lala, Managing Director at OANDA Solutions for Business, looks at how accountants, treasurers and financial officers can deal with a region divided in approach.
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When it comes to Central Bank activism, it’s clear each institution has to play the hand it is dealt. This is especially true where two Central Banks – the Reserve Bank of India (RBI) and the Reserve Bank of Australia (RBA) – are playing two very different strategies.
First off is Australia, whose very much decided to stick with its hand as the bank surpasses a full year without changing interest rates at all. In fact, Australia’s rates are forecasted to remain at rock bottom lows of 1.5 per cent for another twelve months, as it tries to get a grip on a strong dollar and weak inflation. And according to the Reserve Bank of Australia Governor Philip Lowe, it looks like Australia is keeping its hand of low rates for the foreseeable future.
On the other side of the table however is India, whose Central Bank just this month opted to twist – cutting its interest rates to the lowest level since 2010. The first cut seen this year by an Asian Central Bank. The country was battling low inflation and needed to cut its rates to bring it back into line, following the turbulence caused by Prime Minister Narendra Modi’s high-impact decision to recall the country’s largest cash note.
Both countries faced similar problems, namely weak inflation, yet both reacted differently to curtail these problems. While on the surface, the fact two Central Banks find themselves on different paths shouldn’t be a huge dilemma. However, for any company exposed heavily to the region, it can cause confusion and rate disparity across the two currencies. For example, India’s rate cut led to a jump in inflation. A jump not matched across the region and one that would have to factored in by exposed corporates.
With one country pursuing a patient approach to monetary policy, and another going all in against the grain of the region, businesses exposed to both regions need to ensure that they have a wide range of information to draw on to get a true market price. Thankfully, accountants, financial directors and CFOs alike now have access to advanced technology that can integrate exchange rate APIs into ERP systems and financial management platforms – making data more accessible than ever before. This is especially important as the Australian dollar continues to beat analyst expectations and gain against a weak US dollar – spurred largely by rising commodity prices and the Chinese construction boom. All of which is happening despite Australia’s low interest rates.
Of course, exchange rate data is crucial. But firms also need to be wary of the fact that there is more than one exchange rate. As well as market rates, Central Banks also publish their own rates independently. Both have their strengths, but for a corporate to be in the best position, an automated source that provides both sets is the best solution.
Finally, it’s also worth noting that Central Bank activism here often differs as they have a different scope of responsibility to their counterparts in Europe. Unlike, for example, the ECB which only focuses on price stability, Central Bank activism in Australia and India focus on employment, growth or even the welfare of the people (thanks to an Australian law from the 1940s). This influences the bank’s decisions in a different way, and this behaviour needs to be factored into forecasts and predictions made by the treasury and finance teams.
As monetary policies vary, corporates exposed to these currencies face increasing risks, something that is reinforced by the fact that Indonesia’s Central Bank recently cut interest rates out of the blue. Ultimately, Central Bank activism as with India’s and Australia’s Central Banks play their own strategies, corporates should also keep their cards close to the chest, giving themselves the best advantage with the right data, the right rates, and the best insights to avoid busting out.