Rupee, work its way to a guided descent – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/rupee-work-its-way-to-a-guided-descent/articleshow/93012926.cms

Synopsis

The Reserve Bank of India (RBI) has at its disposal the world’s fifth-largest foreign exchange stockpile that can cover the country’s current levels of merchandise trade deficit for nearly two years.

The rupee this week breached the psychological barrier of 80 to a dollar. This should not cause undue concern. The Reserve Bank of India (RBI) has at its disposal the world’s fifth-largest foreign exchange stockpile that can cover the country’s current levels of merchandise trade deficit for nearly two years. RBI has dipped generously into these reserves as the dollar strengthened against the rest of the world’s currencies on quantitative tightening by the US Federal Reserve. Part of the drawdown in reserves is also due to the depreciation of other fully convertible currencies that have fallen further than the rupee, which is in a managed float. More global capital flight is due as interest rate trajectories diverge among economies recovering from pandemic lockdowns and a subsequent oil shock.

The pace of capital flight may be moderating with crude oil edging lower from its peak in the immediate aftermath of the Ukraine war. India withdrew a windfall tax on upstream oil companies a day after the rupee crossed the defensive milestone, indicating the pressure on central banks across the world to front-load interest rate increases may be abating. The Fed and RBI will be announcing rate actions over the next fortnight and equity markets have turned bullish about the size of the expected hikes. A less hawkish Fed could quell concerns over throttling global economic growth in its battle against inflation.

A strong defence of the rupee is part of India’s policy playbook because demand for its exports is more price-elastic than for its imports. This caps the extent of currency depreciation, particularly when energy inflation is the focus of monetary policy. Capital flows to emerging economies are principally determined by their pace of growth and the central bank has been trying to avert a hard landing during its policy normalisation. India needs to retain its place among the fastest-growing major economies once portfolio investments resume after their flight to safety. The rupee will, thus, have to remain in guided descent.

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