*****Shoring up early: RBI’s measures to attract dollars are a prudent call. Good news is that commodity prices are falling–TIMES OF INDIA

Clipped from: https://timesofindia.indiatimes.com/blogs/toi-editorials/shoring-up-early-rbis-measures-to-attract-dollars-are-a-prudent-call-good-news-is-that-commodity-prices-are-falling/

TOI Edit

TOI Edit

Times of India’s Edit Page team comprises senior journalists with wide-ranging interests who debate and opine on the news and issues of the day.

RBI on Wednesday introduced a set of measures to encourage foreign exchange inflows. They aim to ensure macroeconomic stability and, therefore, are temporary in nature. They will work mainly through three channels. Incremental deposits raised till November through FCNR and NRE don’t have to meet regulatory requirements such as cash reserve ratio which makes it a relatively more attractive option for banks. There’s another set of measures to attract foreign portfolio investment (FPI) into debt. Plus, conditions that need to be met by Indian firms planning to raise debt abroad have been eased.

India’s foreign exchange reserve position is comfortable at $593 billion. However, as we run a current account deficit for the most part, accumulated reserves are relatively less stable. Uncertain global economic and financial conditions can lead to sudden outflows, a sharp currency depreciation and an adverse impact on inflation as we are a net commodity importer. Adequate foreign exchange reserves act as a shock absorber and allow RBI to smoothen currency depreciation. This has a positive spin-off on the domestic economic environment, including for farmers who depend on fertiliser imports. Consequent to this approach, the rupee has depreciated by only about 4% against the US dollar since April despite global volatility.

The Russia-Ukraine conflict is the root cause of volatility and the recent surge in commodity prices. This price trend, however, appears to have lost steam. The Indian crude basket was $104/barrel on Wednesday, more than 10% lower than the price level which prevailed a few weeks ago. Similarly, in the case of other commodities such as urea, copper aluminium and sunflower oil, prices declined. There was a surge in March and April, but its adverse impact on demand led to easing of 10-30% in prices of some key commodities in June.

The external shock that drove commodity prices higher seems to have played out for the moment. It makes RBI’s task a little less challenging as food and fuel prices constitute 55% of the consumer price index. While they are not under RBI’s control, a surge in these prices leads to second-round effects and subsequent increase in interest rates. However, global financial conditions are yet to stabilise. Therefore, it’s prudent on RBI’s part to encourage capital inflows when India’s macroeconomic indicators are not flashing red. Prudence enables economic growth.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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