A record high foreign exchange reserves and the lowest current account deficit in living memory places the central bank to deal with the currency swings from a position of strength rather than get into a fire fighting mode as it had done during the past crises.
“Flight to safety has led to spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures,’’ the RBI said in a statement. “Mismatches in US dollar liquidity have become accentuated across the world.”
Current account deficit, the excess of imports over exports, tumbled to 0.2 percent of the gross domestic product at $ 1.4 billion in the December quarter, from 2.7 percent, or $17.7 billion last year. It was $ 6.5 billion, or 0.9 per cent in the September quarter.
The current account is expected to move to surplus in the March quarter due to a plunge in crude oil prices, a key contributor to the deficit.
Emerging market currencies across the world have been on a slide as investors dump assets in their flight to safety. In the process, the demand for the US dollar has been surging across the word resulting in USD shortage. The central bank is set to auction $2 billion on Monday where banks can deposit Indian rupees to get US dollar for a price.
These funds would be available for six months. India’s foreign exchange reserves are at a record $ 487.24 billion.
“It stands ready to take all necessary measures to ensure that the effects of the COVID-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally,” the regulator said.
The Indian rupee has fallen 4.07 percent this year as foreign investors sell domestic securities aggregating Rs. Rs. 23,237 crores. It has aggravated in the past two weeks as the pandemic panic spread. Furthermore, the rush to hedge open USD positions has also been pressuring the market.
But the crisis that is rocking the world comes at a time when the RBI is better positioned than it was during other times like in 2013 when the global markets swooned after Fed Chairman Ben Bernanke’s `taper tantrum’ remarks. That was when the CAD was at record highs that forced the RBI to come up with a special deposit scheme where it bore the currency risk.
With this the Indian central bank joins the European Central Bank to taking action to smoothen market volatility, but has chosen to avoid drastic measures such as the Federal Reserve and the Bank of England that have cut interest rates.
Although there’s an expectation that interest rate could be reduced, the RBI’s Monetary Policy Committee has stood its ground with inflation remaining a threat.