As external environment becomes challenging, RBI moves to boost inflows, anticipating pressures ahead | The Indian Express

Clipped from: https://indianexpress.com/article/opinion/editorials/rbi-moves-to-boost-inflows-anticipating-pressures-ahead-8015851/

For the entire first quarter, the deficit was more than double the level observed last year, and many analysts are now expecting the current account deficit to widen beyond 3 per cent of GDP this year.

trade deficit, Union Ministry of Commerce and Industry, merchandise trade, merchandise trade deficit, GDP figures, US Federal Reserve, Indian express, Opinion, Editorial, Current AffairsThe structural constraints that lie at the heart of the current account deficit — a heavy dependence on imports of crude, coal and gold — are yet to be tackled.

Data from the Union ministry of commerce and industry on Monday showed that the merchandise trade deficit had surged to a record high of $25.6 billion in June. For the entire first quarter, the deficit was more than double the level observed last year, and many analysts are now expecting the current account deficit to widen beyond 3 per cent of GDP this year. This comes at a time when capital outflows have gathered pace as central banks across the world, especially the US Federal Reserve, have begun to sharply raise rates. Since September last year, the country’s foreign exchange reserves have fallen quite sharply. Alongside, the DXY or the dollar index, which measures the strength of the greenback against six major currencies, has strengthened as other currencies have weakened. The Indian currency has also fallen, and on Thursday, ended the day at 79.16 against the dollar. With this backdrop, the Reserve Bank of India unveiled a slew of measures designed to attract capital flows on Wednesday.

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Broadly, the measures revolve around three areas. First, for incremental foreign currency non-resident bank deposits (FCNR B) and non-resident external (NRE) deposits, banks have been exempted from the cash reserve ratio and statutory liquidity ratio requirements, thereby incentivising them to raise dollar deposits. Alongside, analysts expect the easing of restrictions on interest rates to aid banks in passing on the benefits to depositors. In a global environment of rising interest rates, it is hoped that this will help increase the attractiveness of these deposits. However, this is different from the scheme that was rolled out in 2013 when the RBI had provided a subsidised dollar swap window. During that infamous taper tantrum episode, roughly $30 billion in FCNR-B deposits flowed in, boosting reserves, and providing support to the currency. Second, the central bank has also relaxed the rules regarding foreign portfolio investments in government and corporate bonds, aimed at easing short-term capital flows. There have also been changes to the framework governing foreign currency lending and external commercial borrowings.

In an era of tightening global monetary conditions, and capital outflows, with some analysts expecting the current account deficit to touch $100 billion this year, and with net FDI not enough to offset this, the policy options before the central bank, as in previous such episodes, will become increasingly limited. While the country’s foreign exchange reserves remain at a healthy level, these measures perhaps suggest that the central bank is anticipating pressures ahead. To what extent they will facilitate capital inflows in the near term will be evident in the days ahead. However, the structural constraints that lie at the heart of the current account deficit — a heavy dependence on imports of crude, coal and gold — are yet to be tackled.

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