RBI keeps rupee out of cur­rency war for cred­i­bil­ity

The Pak Banker - - COMPANIES/BOSS -

In­dian cen­tral bank Gover­nor Raghu­ram Ra­jan will prob­a­bly stay out of any cur­rency war trig­gered by China's yuan de­val­u­a­tion judg­ing from his pol­icy stance to date. Ra­jan has voiced crit­i­cism of na­tions us­ing ex­change-rate de­pre­ci­a­tion to boost their economies and said this month it's bet­ter to let the rupee "find its level" with the cen­tral bank step­ping in only to curb volatil­ity. Stan­dard Char­tered Plc and Bar­clays Plc say Ra­jan's in­fla­tion fo­cus, fall­ing oil prices and a pos­si­ble in­crease in U.S. in­ter­est rates this year will pre­vent him from de­pre­ci­at­ing the rupee ag­gres­sively.

Ra­jan won the trust of global funds by boost­ing the rupee from a record low in Au­gust 2013 and wag­ing a war against price in­creases. He's re­sisted pres­sure from the fi­nance min­istry in keep­ing bor­row­ing costs among the high­est in Asia.

Curb­ing liv­ing costs is key for sus­tained growth in Asia's third-largest econ­omy, where most peo­ple live on less than $2 per day. In­dian ex­ports have fallen for seven straight months -- the long­est stretch of declines since 2009 -- as the rupee strength- ened against cur­ren­cies of trade part­ners in the past year even as it fell 5.6 per­cent against the dol­lar.

"I don't think China's move will trig­ger a cur­rency war and even if it does, the In­dian cen­tral bank is un­likely to be drawn into it," said Divya Devesh, Stan­dard Char­tered's Asia for­eign-ex­change strate­gist in Sin­ga­pore. "If the rupee out­per­forms the re­gion, the RBI will step in to limit the ex­tent of the cur­rency's over-val­u­a­tion in real ef­fec­tive terms, as it has been do­ing."

The 53 per­cent plunge in Brent crude in the past year helped nar­row the cur­rentac­count deficit to a seven-year low in the year ended March and is one rea­son why the rupee's drop against the dol­lar hasn't raised alarm bells for pol­icy mak­ers. Con­sumer-price gains in the na­tion, which re­lies on im­ports for about three quar­ters of its oil, have slowed to 5.40 per­cent in June from as high as 8.60 per­cent in Jan­uary 2014. "In­fla­tion is a ma­jor fo­cus for Ra­jan," said Mi­tul Kotecha, head of Asia-Pa­cific for­eign-ex­change strat­egy at Bar­clays in Sin­ga­pore. "I don't think In­dia will be nec­es­sar­ily dragged into" weak­en­ing its cur­rency too sharply, he said.

Ra­jan has set an in­fla­tion tar­get of 6 per­cent by Jan­uary.

Even as In­dia runs a $42 bil­lion trade deficit with China and a weaker yuan would only make Chi­nese goods cheaper, Ra­jan may fa­vor mea­sures to boost pro­duc­tiv­ity and re­duce de­pen­dence on im­ports, ac­cord­ing to Ko­tak Se­cu­ri­ties Ltd.

"If you're a net im­porter, you can't have de­val­u­a­tion as a stated ob­jec­tive as you are then in­creas­ing the cost of your im­ports," said Su­vodeep Rak­shit, an economist at Ko­tak Se­cu­ri­ties in Mum­bai. Ra­jan will keep the main pol­icy rate un­changed at 7.25 per­cent this year, he said.

China's de­val­u­a­tion will have an im­pact on In­dian ex­ports and for­eign di­rect in­vest­ment into the na­tion, Fi­nance Sec­re­tary Ra­jiv Mehrishi said on Tues­day.

The rupee has ad­vanced in 2015 against 26 of 31 ma­jor cur­ren­cies tracked by Bloomberg, and is al­most 25 per­cent over­val­ued ac­cord­ing to the RBI's trade-weighted in­dex of ex­change rates of In­dia's six largest trade part­ners. It has strength­ened 12 per­cent rel­a­tive to a bas­ket of 36 cur­ren­cies, a cen­tral bank's mea­sure of its real-ef­fec­tive ex­change rate shows.

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