Since taking on the role of Governor of the Reserve Bank of India, Raghuram Rajan certainly hasn’t been sitting on his laurels. After making some rather provoking statements regarding his policy intentions, Rajan shocked markets by issuing a surprise rate increase at his first central bank meeting.

And with Rajan linking interest rates to consumer-price inflation, it appears that additional rate increases could be on the horizon.

A decisive hand like Rajan's was certainly needed, as in recent months data has shown the full extent of the fiscal issues India must overcome.

As well as growth slowing to a decade low and high core inflation, the Reserve Bank of India has been trying to combat a weakening Rupee. After the US Federal Reserve hinted at the possibility of easing being tapered before the close of the year the Rupee fell to record lows against its US counterpart, and has continued trading at over 60 Rupee per Dollar for several weeks.

The majority of economists surveyed by Bloomberg expect Rajan to hike rates further when the RBI meets in October, and according to one industry expert; ‘The bank seems to be moving towards a de facto inflation-targeting regime and that’s going to be a big change in its policy framework. It would represent a more consistent policy to fight price pressures.’

Although the Rupee has posted gains over the last two days, it ends the week on a low as investors look ahead to next week’s current account deficit data for India.
Anil Kumar Bhansali of Mecklai Financial commented; ‘The current account deficit numbers should be worse that last time’s figure of 18 billion dollars as in the fiscal first quarter oil and gold imports have been higher and exports have been lower. The Rupee looks to me to be in a range of 61 to 64 to the Dollar.’

The currency has also been adversely affected as US Federal shutdown fears reduce the appeal of higher-risk assets. The fallout from the September 30th deadline for US budget agreement could result in significant market movement next week.

Currency markets will also face volatility following next week’s central bank decisions and manufacturing data from China.

Additionally, the US non-farm payrolls report, scheduled for release at 13:30 GMT on Friday 4th will be a major indication of whether or not the Federal Reserve will taper stimulus in October.

A poor number could reduce the likelihood of tapering occurring before 2014, a circumstance which would boost emerging-market assets like the Rupee.