as the rupee broke through the 81 mark against the US dollar intra-day Friday, policymakers in New Delhi are faced with a dilemma as the Reserve Bank of India (RBI) has burned forex reserves at a dramatic pace this calendar year to avoid exchange rate volatility – an intervention that many in the market believe will boost the currency. defend a certain level.
In just eight months between mid-January and mid-September this year, forex reserves have been depleted by nearly $90 billion, or about an average of $11 billion per month. For the weekend of September 16, India’s forex reserves stood at $545.65 billion, compared to $634.97 billion in the weekend of January 14.
“How long?” asked the CEO of a foreign institutional investor (FII), who declined to be named. While persistently high inflation of over 7 percent has prompted the RBI to raise its policy rate, the government wants to maintain GDP growth and create more jobs as several major states head to the polls over the next 12-18 months.
With several agencies slashing its GDP growth forecast to 7 percent and below, the Union’s Treasury Department faces the dilemma of whether aggressive monetary policy tightening is the right strategy for India, which faces challenges that may require a different response. require than the western countries. In this context, Finance Minister Nirmala Sitharaman has already said that “RBI may not be as synchronized as western countries would” – in other words, raising key rates may not be the best thing for India.
bumpy road ahead
GROWTH demands and the need to create jobs weigh heavily on the mind of the government with elections in more than a dozen states over the next 12-18 months. Instead of sharp rate hikes to contain inflation, policymakers prefer to let the rupee depreciate.
Policymakers at both the government and the RBI are convinced that much of the inflation is ‘imported’. They discuss relative advantages and disadvantages of an “overt” action such as a rate hike versus a “hidden” gradual depreciation of the rupee. “Unlike monetary tightening through rate hikes, which is akin to using a sledgehammer, it’s a better tool to level the rupee, to curb demand,” said an official, who declined to be named. become. A falling rupee makes imports more expensive and dampens demand.
According to the RBI’s April 2022 monetary policy report, a 5 percent depreciation of the rupee could push inflation up 20 basis points, while GDP growth could be 15 basis points higher. In 2022, the rupee has fallen 8.2 percent in value against the US dollar so far in 2022. Policymakers in New Delhi seem to be circumventing the view that the RBI should not hold a certain level sacred. “This (gradual weakening of the rupee) covert measure is better than an overt monetary policy action of rate hikes,” said a policymaker who declined to be named.
“Even today, the rupee closed above 81,” a senior executive said in an FII, pointing to the central bank’s aversion to letting the rupee slip. The Indian rupee broke through the 81 mark against the US dollar for the first time on Friday before settling at 80.98 as the greenback continued to strengthen against all other major currencies following an aggressive announcement of a rate hike by the Federal Reserve.
In two days, since the Fed’s announcement Wednesday, the rupee has lost 1.5 percent.
It opened at a record low of 81.03 against the US dollar, compared to its previous closing price of 80.86. The domestic currency fell to an intraday low of 81.22 per US dollar. The weakness of the rupee also dampened investor sentiment in the stock market and the benchmark Sensex at BSE fell sharply by 1020 points or 1.7 percent to close at 58,098.9. The broader Nifty on NSE lost 302.45 points or 1.7 on Friday to close at 17,327.3. In the past two trading sessions, the two indices have lost more than 2.2 percent.
The house has already been divided by the RBI on the amount and pace of rate hikes. There are early but discernible signs of disagreements between the government and the central bank over the latter’s monetary action to control inflation and the former’s need to rekindle growth. The RBI’s three-day monetary policy committee kicks off on September 28, and the action will be announced on September 30.
North Block has learned to lean towards a favorable pace of rate hikes by the RBI rather than the aggressive stance of developed country central banks, as inflation is primarily driven by global factors and other concerns about employment and slow investment. priority over inflation.