The Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said that there is zero tolerance for volatile and bumpy currency movements as the central bank engages with the forex market and ensures that the rupee finds its level in line with its fundamentals.
On inflation, the Governor said it appears to have peaked and is moderating, with the Reserve Bank of India’s approach being to tackle it squarely while keeping growth sacrifice within manageable limits. RBI aims to have a soft landing for the economy.
“I would like to reiterate that we have no particular level of the rupee in mind, but we would like to ensure its orderly evolution and we have zero tolerance for volatile and bumpy movements,” Das said at the Bank of Baroda’s Annual Banking Conference.
The market complimented the Governor’s talk leading to the Indian unit closing nine paise stronger on Friday.
The Rupee closed at 79.86 per dollar against the previous close of 79.95. Even as crude oil prices eased and FPIs bought small quantities in equity markets, RBI sold dollars in a big way, ensuring that the Rupee pulled back from intra-day low of 79.9175.
The equity markets also rose for the sixth day in a row with the 30-share BSE Sensex going up by 0.70 per cent (or up by 390.28 points) to close at 56,072.23 points, on Friday. This was the best week for equity markets in 18 months.
The Governor emphasized that it is important to recognize that spillovers from the global monetary policy tightening, the geopolitical situation, the still elevated commodity prices – especially crude – and the lingering effects of the pandemic, all coming together, have become overwhelming for all countries the world over.
“Even reserve currencies such as the Japanese yen, the Euro and the British pound sterling have not been spared. Portfolio funds are selling off assets and fleeing to safe haven. Emerging market economies (EMEs) are particularly affected by capital outflows, currency depreciations and reserve drawdowns, complicating macroeconomic management in these countries,” he said.
Not much impact
Das underlined that the impact of these overwhelming spillovers on India has been relatively modest. “In fact, the Indian rupee is holding up well relative to both Advanced and EME peers. This is because our underlying fundamentals are strong, resilient and intact. The recovery is gradually strengthening.
“The current account deficit is modest. Inflation is stabilizing. The financial sector is well-capitalized and sound. The external debt to GDP ratio is declining. The foreign exchange reserves are adequate,” he said.
The RBI Chief observed that in recognition of the fact that there is a genuine shortfall of supply of forex in the market relative to demand because of import and debt servicing requirements and portfolio outflows, the RBI has been supplying US dollars to the market to ensure that there is adequate forex liquidity.
“After all, this is the very purpose for which we had accumulated reserves when the capital inflows were strong. And, may I add, you buy an umbrella to use it when it rains!” he said.
Das stressed that a predominant part of the outstanding ECBs is effectively hedged. “For India, our internal research estimates the optimal hedging ratio (which calculates the proportion of hedging that minimizes the variance of the portfolio) at 63 per cent. Taking into account natural hedges and the exposure of public sector companies, the optimal hedge ratio condition is comfortably satisfied in the case of the stock of External Commercial Borrowings in India’s external debt,” he said.
July 22, 2022