The Reserve Bank of India is likely to raise the interest rates by 50 basis points in the fourth quarter, said HSBC in a report, after finance minister Arun Jaitley announced a slew of measures aimed at stemming a sharp plunge in rupee, the worst-performing Asian currency this year.

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One basis point is one-hundredth of a percentage point.

HSBC expects the repo rate to reach seven percent by the end of this year.

The repo rate is the rate at which the central bank of the country will lend funds to the commercial banks. The commercial banks borrow funds only if they witness a shortfall in their funds.

On Friday, the government, in order to encourage capital flows to tackle the widening current account deficit, rolled a plan of action that ranges from boosting foreign portfolio investor participation in the bond market to easing rules on external commercial borrowings.

Here are the highlights of HSBC's report on the recent measures announced by Jaitley:

The financial house expects the government authorities to unveil an exports revival master plan. This is because India's core exports have fallen by four percent of its GDP since 2014 which could be one of the key reasons for the widening of the current account deficit. "Some of this could reverse on the back of improvements in the Goods and Services Tax (GST) and a weaker rupee," the HSBC report said.

HSBC said that the measures introduced to boost higher inflows are likely to materialise only if other factors such as the global market environment, become favourable and the investors are keen to invest in India again.

The financial house believes that once the global trade tensions settle, India's strong macroeconomic fundamentals will surface 'provided it focuses on the right policy actions'.

The firm is expecting the rupee to reach 73 and expects the depreciation pressures to persist. "We expect the medium-term depreciation pressures on the rupee to persist and see dollar-rupee at 73 come year end-2018 and 74 by mid-2019," it said. HSBC suggested that measures to encourage the dollar inflows from non-residents or to alleviate dollar demand by the oil importers can help in strengthening the currency.

However, the report also said that it is not necessary for the rupee to strengthen mainly on the basis of falling oil prices. "If oil prices are dropping because of concerns about global demand, then the rupee may not benefit much amid general weak risk sentiment. India may be a relatively closed economy from the perspective of its growth drivers, but the rupee is still reliant on global capital flows to help fund the current account deficit," the report said.

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First Published:Sept 17, 2018 2:26 PM IST