Centre, RBI brace for more rupee volatility
3 min read 30 Jun 2022, 12:00 AM ISTAverse to sudden plunge, but won’t resist rupee at 80 a dollarRBI has been intervening in the market to support the rupee, leading to a significant depletion in foreign exchange reserves
PremiumMUMBAI/NEW DELHI : The government is coming around to the view that the Indian currency could weaken to 80 to the dollar over the next few weeks, a senior official said, despite the central bank’s intervention to support the rupee.
The rupee’s depreciation over the past weeks has figured in the discussions between the Reserve Bank of India (RBI) and the government, the official aware of the talks said, requesting anonymity. “We have no problem if the exchange rate depreciates to 80 to a dollar. However, the RBI won’t have the exchange rate slipping by a rupee in two days," the official said, emphasizing the central bank’s concern about the pace of depreciation.
The rupee has been slipping to new record lows since Russia invaded Ukraine in late February as worries around high crude oil and commodities prices, a strong dollar, and slowing economic growth are prompting money managers to unload assets that underperform during periods of slow global growth. A weaker rupee also spurs inflation as India imports nearly 85% of its oil requirements.
While the central bank has failed to stanch the rupee’s slide, it has followed a policy of intermittent interventions through state-run banks in the forex markets to slow down the pace of depreciation. However, while it will continue to stagger the pace of depreciation, the RBI may not resist the slide to the level of rupees-80-to-a-dollar, the official indicated.
The rupee has depreciated over 5% against the dollar this year, with the currency touching a low of 78.87 on Tuesday.
Spokespersons for RBI and the finance ministry did not respond to requests for comments.
Last week, RBI’s deputy governor Michael Patra said that the central bank is intervening in the market to defend the rupee against any sharp volatility.
“We will stand for its stability, and we are doing it. We are there in the market, and we will not allow disorderly movement of the rupee. We have no level in mind, but we will not allow jerky movements. That is for certain," Patra, who looks after the monetary policy department in RBI, besides being a member of the monetary policy committee (MPC), said at a meeting organized by a business lobby group.
At its off-cycle meeting on 4 May, the RBI’s monetary policy committee raised the repo rate by 40 basis points, hours ahead of the anticipated Fed rate hike of 50 basis points (bps). Had the RBI not increased its policy rate, the interest rate differential between the US and India would have widened, accelerating the pace at which foreign portfolio investors are pulling out of India—they have pulled out $20.5 billion from India since Russia invaded Ukraine— accelerating the rupee’s fall.
The interest rate differential is wider despite the 4 May hike, as while the Fed hiked its policy rate further by 75 bps on 15 June to tame decades-high inflation in the US, the RBI increased its policy rate on 8 June by 50 bps. More Fed hikes are expected in the coming weeks, which is likely to add pressure on the RBI’s MPC to go for more aggressive rate hikes to narrow the gap.
RBI and the government are concerned about the fallout of the rupee’s depreciation, the official said. Imported inflation will sustain, given India depends on imports for more than two-thirds of its oil requirements. Another worry is the current account deficit, or CAD, which is projected to widen this year to 3% of GDP, a level considered unsustainable for India. If crude prices climb to $120 a barrel and above, as some estimates suggest, the deficit may widen further. India’s oil consumption isn’t price-sensitive and may not adjust to rising costs, the official added.
RBI has been intervening in the market to support the rupee, leading to a significant depletion in foreign exchange reserves. Since 25 February, reserves have declined by $40.94 billion.
Some experts, too, said that RBI should allow the rupee to depreciate.
“RBI does have ample foreign exchange buffers. For now, a gentle depreciation of the rupee may well be called for—both to correct INR overvaluation and prepare for possible stress scenarios. We then must use the time made available by the RBI’s buffers to create domestic jobs and output so that our external balance improves. This could well mean USD-INR should cross 80 before long, even if it makes for unpleasant newspaper headlines. All of this will have implications for capital flows, inflation, and monetary policy," said Ananth Narayanan, associate professor, SP Jain Institute of Management and Research.
