Wait and Watch or ?

The rupee’s latest record slide in the forex market has sparked a debate in India. Should the RBI intervene to strengthen the rupee? 

The Reserve Bank’s stated policy is to reduce volatility, rather than target a specific level for the currency. 

Some of the loudest complaints have come from companies worried about the likely impact  of currency depreciation on corporate balance sheets. Secondly, when the rupee depreciates, the exchange-rate pass through to fuel prices and, as a result, the rest of the economy, is high. This discomfort is something that we are all acutely aware of. 

So if we conclude that the RBI should do something; the question is what?

The most obvious is to intervene in foreign-exchange markets by selling dollars given that the central bank has more than $400 billion in reserves. Secondly, it could raise interest rates, given the weak currency, higher oil prices and the latest above-target inflation. Thirdly, it could borrow dollars from non-resident Indians.

These methods were tried in 2013 when the rupee was rapidly sliding. 

The result? The rupee fared worse than all other emerging-market currencies. 

Every move — tightening liquidity and raising interest rates, to the discussion of non-resident borrowing and restrictions on derivatives — was interpreted as a panic reaction that only confirmed the rupee was under pressure. Foreigners felt it was better to take money out of India sooner rather than later, and the fall of the rupee became a self-fulfilling prophecy. 

However, currency volatility settled and the RBI continued to manage the rupee carefully. However, the currency is today one of Asia’s worst performers, losing 12 percent this year.

Sure some sectors of the economy gain from rupee depreciation. It for instance, helps export growth, companies struggling with the transition to GST and which are small and labour-intensive, and companies which have had a hard time getting credit. A weaker rupee would also offset competition of cheap imports from countries like China, which could give domestic industries a much-needed boost.

The RBI and India’s government, at present, are calm.  

Let us wait and watch.

Throwback to September 2013 or is it?

When Raghuram Rajan took charge as governor of the Reserve Bank of India in September 2013, the rupee was in free fall, inflation was high, India had a large current account deficit, and exchange reserves were falling.

As measure after measure failed to stabilise markets, speculators sensed a full-blown crisis and labelled India one of the Fragile Five economies.

Today 10 September 2018, at the Interbank Foreign Exchange (Forex) market, the Indian Rupee opened at an all time record low of 72.15 a dollar from its previous close of 71.73 and slipped to hit a fresh low of 72.18, down by 45 paise. 

Forex dealers said besides strong demand for the American currency, buying by importers, mainly oil refiners in view of surging crude oil prices and capital outflows, weighed on the domestic currency.

In addition, the dollar strength against its rival currencies overseas amid fears of a possible escalation in the US-China trade conflict also put pressure on the rupee.