Rupee lessons PDF Print E-mail
Friday, 29 August 2014 00:00
AddThis Social Bookmark Button

Shobhana's edit

Rajan ends a year in office on a high note


With $34 billion coming in through non-resident deposits and bank capital last year, and foreign funds pumping in close to $30 billion in the stock and bond markets so far in 2014, the rupee has rebounded smartly from its lows in August last year when it looked like 70-to-the-dollar was inevitable. Looking back, it was a series of deft moves by Reserve Bank of India Governor Raghuram Rajan, who took over in early-September last year, that arrested the slide in the currency while hopes that a stable government at the Centre would usher in economic reform and recovery saw it strengthen gradually. Even as the world waited for the US Federal Reserve to take a call on tapering its monthly bond-buying programme, Rajan announced that RBI would provide banks with swaps at concessional rates; banks, for their part, spotted the opportunity to help their overseas clients make a quick buck niftily, loaning them money which would then flow into India as deposits.


If the $34 billion of deposits, way above anticipated inflows, took the edge of speculative bets against the rupee, what got the bears scurrying for cover was Rajan’s move to facilitate the dollar purchases of oil marketing companies (OMCs), since that effectively took a large chunk of the demand—$8-10 billion a month—out of the currency market. Once the central bank announced it was willing to settle the OMCs’ bills in rupees, the currency was out of the woods. And with it, all the talk of India approaching the IMF for a standby facility and discussions on whether India should become part of an Emerging Markets Bond Index were dropped. Economists expect the rupee to trade in the range of 60.50-61 to the dollar; while not specifying a level for the rupee, Rajan has indicated that 55-to-the-dollar would be too strong while 70 would be too weak and has drawn attention to a study done by the finance ministry which said that 60-62 was a reasonable range. Economists believe the central bank will look to recouping reserves to ensure that they cover roughly eight months of imports; the country’s forex reserves are now close to the all-time high of $320 billion. While there will be a cost to buffering the reserves, given the interest rate differential between India and the developed economies (estimated at around 5% if the RBI buys $80 billion over the next two years), it would be preferable to the central bank not being adequately armed should the currency depreciate sharply. Indeed, the big lesson from last year’s rout of the rupee is that the central bank cannot afford to be seen as not being able to defend the currency. India cannot afford to find itself in that position again.Rajan ends a year in office on a high note


You are here  : Home Economy Rupee lessons