*****‘Interest rates to harden, rupee to remain under depreciating pressure for some time’ – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/money-and-banking/interest-rates-to-harden-rupee-to-remain-under-depreciating-pressure-for-some-time/article65514444.ece

But India’s robust domestic and external macro-parameters to help cushion global headwinds, says RBI Executive Director

Radha Shyam Ratho, Executive Director, Reserve Bank of India, on Friday said while interest rates are likely to harden in India and the rupee expected to remain under depreciating pressure for some time to come, the country’s robust domestic and external macro-parameters have the ability to cushion the global headwinds and mitigate their impact.

This, he said, would provide headroom for monetary and fiscal policies to pursue the national objectives without being affected by the extraneous shocks.

“India remains on a strong footing and has revved up its armours to ensure that the over-arching goals of macro-economic and financial stability remain preserved and impregnable. The recent signing of various trade agreements, and some in the making, with various nations/blocs will likely galvanise India’s trade diversification strategy. Further, the recently announced PLI scheme is expected to enhance India’s global value chain participation and reduce import dependency in critical sectors, thereby providing impetus to the AatmaNirbhar Bharat goals,” said Ratho at a special session organised by the Merchants’ Chamber of Commerce and Industry here on Friday.

Talking about forex, he said the Reserve Bank’s policy on exchange rate has been to allow it to be determined by market forces, with interventions only to maintain orderly market conditions by curbing excessive volatility, without reference to any pre-determined target level or band.

“It is imperative to note that disorderly movements in the exchange rate can often have a deleterious impact on trade and investment, ultimately affecting real sector variables such as growth and employment, besides endangering overall macroeconomic and financial stability,” he pointed out.

As such, despite headwinds, since the global financial crisis of 2008-09, depreciation pressures, as reflected in the implied volatility of the rupee, has been coming down barring sporadic surges during intermittent crisis episodes such as the Eurozone debt crisis, Taper tantrum, trade war and EMEs outflows (September 2018 to January 2019), Covid pandemic, and most recently, the Ukraine conflict. Further, realised volatility has remained below implied volatility most of the time.

During the ongoing Russia-Ukraine conflict, the Indian Rupee touched a peak realised volatility of around 7.6 per cent as against 15.9 per cent during GFC (September 2008 to June 2009), 16.1 per cent during Eurozone crisis (August 2011 to August 2012), 23.5 per cent during Taper Tantrum (May 2013 to June 2014), 10 per cent during the Trade war period (September 2018 to January 2019) and 10.2 per cent during the Covid pandemic. This reflects an improvement in the macroeconomic and the external sector fundamentals of India over the years, he said.

“While the rupee has depreciated by around 4.3 per cent on YTD basis (till June 7, 2022), other Asian currencies like Malaysian Ringgit, Korean Won, Chinese Yuan and Taiwan Dollar have depreciated more, by 5.1 per cent, 5.4 per cent, 4.7 per cent and 6.2 per cent respectively during the same period. The magnitude of RBI intervention has also been less compared to earlier stress episodes such as in 2008 and 2013. These facts attest to the RBI’s ability to moderate rapid depreciation, which is driven by the motive that there should be no harm to the real economy,” he added.

Published on June 10, 2022

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