1 min read.Updated: 11 Sep 2018, 09:49 AM ISTAparna Iyer
Former RBI governor Y.V. Reddy had talked up the rupee during the 1997 Asian financial crisis. Governor Urjit Patel would do well to take a leaf out of Reddy's book
The Goldilocks period of calm for the Indian rupee in 2017 is now just a distant dream, with the currency plummeting 13% this year. One look at the latest balance of payments data shows why the rupee has suffered. The current account deficit (CAD) was 2.4% of India’s GDP as of June this year, unsustainable in the eyes of investors.
That is not all. Given the tag of emerging market, India is not attractive enough to put money into, especially when advanced countries like the US are back with a bang on the economic growth front. Not only did India see a sharp widening of the current account deficit but financing this deficit also proved very vexing. Portfolio flows were negative although foreign direct investment was 36% higher than the previous year. Therefore, the country’s forex reserves saw a depletion of $11 billion during April-June.
Of course, India is not alone in the stampede of investors exiting emerging market economies. But what can one do when caught in such a stampede? The best option is to find an exit and that’s where the authorities come in. The Reserve Bank of India (RBI) has in the past provided safe exits during such stampedes.
Recall the special deposit swap window that former governor Raghuram Rajan gave to lure inflows. This time, though, there is a belief that the RBI is not doing enough. Forex traders noticed that the usual vigour in intervention is missing.
To be fair, RBI doesn’t want to incentivise speculators by protecting a specific level of the rupee. Also, to its credit the central bank sold more than $25 billion in just three months ended June. The drop of $3 billion in forex reserves during August show that the RBI is not sitting on the sidelines.
But what is missing is the verbal salve that many central banks are known to deftly use in times of excessive currency movements. Former RBI governor Y.V. Reddy had talked up the rupee during the 1997 Asian financial crisis. Governor Urjit Patel would do well to take a leaf out of Reddy’s book.
A verbal balm may go a long way to pacify the currency when mauled by bearish sentiment.
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