*****RBI unlikely to turn ultra-defensive on rupee: Central bank to revise inflation forecast in June | The Financial Express

No plan to buy govt debt to curb yield

The central bank will revise its inflation forecast upwards in its June review, as price pressure in food and fuel have intensified since its April projection.The central bank will revise its inflation forecast upwards in its June review, as price pressure in food and fuel have intensified since its April projection.

The Reserve Bank of India (RBI) will continue to intervene in the foreign exchange market to smoothen the volatility of the rupee, but there is no plan to contain the currency at a certain level, sources familiar with developments said. The central bank will revise its inflation forecast upwards in its June review, as price pressure in food and fuel have intensified since its April projection.

The RBI’s interventions have helped the rupee to recover in the past two sessions, after it hit a record low of 77.46 against the greenback on Monday. The currency has inched up by 22 paise in the last two sessions.

However, the central bank is unlikely to go the extra mile in defending the rupee, nor is it going to allow the domestic currency to slide further steeply, they added. “Both the central bank and the government want to ensure that there is no jerking in the rupee movement; orderly movement is what they are looking at,” said the sources.

In April, the RBI sharply revised up its inflation forecast for FY23 to 5.7% from 4.5% (firmed up before the Ukraine war), with Q1 at 6.3%. India’s retail inflation is expected to have hit an 18-month high of 7.5% in April, according to analysts. However, while raising the repo rate in May, it refrained from an out-of-cycle revision of its inflation forecast.  

Central banks around the world, faced with the unenviable task of dealing with the trade-off between inflation and growth, may seek to drive down demand in the coming months through tightening measures. While input prices have spiked in recent months, pass-through efforts by producers have had limited success, that, too, in select sectors, due to slackness in broader private demand.  

Amid reports that the RBI may have to resort to aggressive tightening in the coming months to curb runaway inflation, sources said it would first ensure gradual and calibrated withdrawal of excess liquidity over a multi-year time frame in a non-disruptive manner. Only after that will it weigh further tightening measures, should the situation so warrant, said the sources.

The drop in the country’s forex reserves in recent weeks—from $630 billion before the Ukraine war to $598 billion as of April 29—has been caused more by the “valuation losses” of forex holdings on account of the weakening of foreign currencies against the dollar than by any bid to contain the rupee slide, said the sources.

Even though the yield on the benchmark 10-year government securities has eased by about 25 basis points in the past two days on mounting speculations the central bank may buy government debt to put a leash on elevated yields, the sources said any such move is highly unlikely.

“There is no plan to do so. The rise in G-sec yield in recent weeks has been driven by external factors (like the US interest rate hike, oil price rise, etc), uncertainties around the global economic recovery and fears of supply far outstripping demand in the bond market,” one of the sources said.

The 10-year G-sec yield had gone up by 31 basis points last week after the central bank hiked the benchmark lending rate by 40 basis points in an out-of-cycle action on May 4. The yield dropped eight basis points on Wednesday to 7.22%.

RBI governor Shaktikanta Das last month said the central bank offered liquidity facilities of Rs 17.2 trillion in the wake of the pandemic, of which Rs 11.9 trillion was utilised. Such measures worth Rs 5 trillion have been allowed to lapse or withdrawn until the end of FY22.

The RBI last month took first set of steps in two years towards normalisation of liquidity management to pre-Covid levels, as it introduced the standing deposit facility (SDF) as the basic tool to suck up excess liquidity from the system. Last week, the RBI hiked the repo rate by 40 basis points and, consequently, raised the SDF rate to 4.15% from 3.75% in April.

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