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Macro stability

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Given today’s exceptional circumstances and our own inflation worries, however, temporary support for the rupee might be justifiable. But then it must not set a rigid floor.

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The rupee slipped to a record low of 78.4 against the dollar on Wednesday. Persistent capital outflows have pushed it down. These are unlikely to abate, given the US Federal Reserve’s steep rate-hike curve that’s making dollar assets more attractive than those denominated in emerging-market currencies. Worsening matters, economic uncertainty caused by the Ukraine war has led to safety-seeking behaviour.

Unfortunately, with US inflation at a 40-year high and an end to European hostilities nowhere in sight, the rupee might have more weakness in store. Analysts are predicting 80 to the dollar by year-end, possibly earlier. A lot would depend, though, on the Reserve Bank of India’s (RBI) response. Its stated policy is to smoothen jerky movements. Given today’s exceptional circumstances and our own inflation worries, however, temporary support for the rupee might be justifiable. But then it must not set a rigid floor. That could make for an abrupt drop later on, which may induce a shock that would reverberate across our financial system. Eventually, the rupee must go by its market float value. Either way, RBI’s balance must aim for macro-economic stability.

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