RBI chief builds re­serves chest to curb ru­pee slump

The Pak Banker - - FRONT PAGE -

Re­serve Bank of In­dia Gov­er­nor Raghu­ram Ra­jan is re­build­ing the coun­try's for­eign re­serves as he sees an un­avoid­able slide in the ru­pee un­til the war on in­fla­tion is won.

The cur­rency stock­pile grew by $2.3 bil­lion in the week to Feb. 5, the most since the pe­riod ended Sept. 11, ac­cord­ing to cen­tral bank data com­piled by Bloomberg. The re­serves have risen $4.3 bil­lion in three straight weeks, the long­est run since Oc­to­ber, as the ru­pee fluc­tu­ated be­fore de­clin­ing to within 0.3 per­cent of its record low on Wed­nes­day.

Ra­jan said on Feb. 13 a cer­tain amount of de­pre­ci­a­tion "is nec­es­sary" un­til in­fla­tion comes down, not­ing In­dia's need to keep its com­pet­i­tive edge in global trade. While the ru­pee has de­clined 3.8 per­cent ver­sus the dol­lar in the past three months amid out­flows from bonds and stocks, it was about 24 per­cent over­val­ued against the RBI's bas­ket of six cur­ren­cies at the end of Jan­uary on a trade-weighted and in­fla­tion-ad­justed ba­sis.

"There was a bit of a pause, but they are back to the pol­icy of re­serves ac­cu­mu­la­tion, build­ing up the war chest, and re­ally be­ing able to con­tinue to be able to dampen the volatil­ity in the cur­rency mar­ket," said Mi­tul Kotecha, head of Asian for­eign-ex­change and in­ter­est-rate strat­egy at Bar­clays Plc in Sin­ga­pore. "Ra­jan's com­ments in­di­cate the RBI is likely to steer the cur­rency on a fairly steady de­pre­ci­a­tion path along the lines of keep­ing a fairly sta­ble real-ef­fec­tive ex­change rate."

The ru­pee is Asia's worst per­former af­ter South Korea's won in the past three months as over­seas funds pulled a net $3 bil­lion from In­dian stocks, and for­eign hold­ings of lo­cal debt fell by $1.5 bil­lion amid a global wave of risk aver­sion and slow­ing growth at home. The In­dian cur­rency fell 0.4 per­cent to 68.6350 a dol­lar as of 9:48 a.m. in Mum­bai. It sank to an un­prece­dented 68.8450 in Au­gust 2013.

"Our in­tent is not to de­pre­ci­ate the ru­pee in a steady way or any­thing of that sort," Ra­jan said in a speech in the south­ern state of Ker­ala. "Our fo­cus is on bring­ing down in­fla­tion so that peo­ple will not have to ask why the ru­pee is weak­en­ing."

Ra­jan is ac­cept­ing a weaker ru­pee as ex­ports con­tracted for the 14th straight month in Jan­uary. The fastest con­sumer-price gains in 17 months has kept him from adding to last year's four in­ter­est-rate cuts. Asia's third-largest econ­omy ex­panded at the slow­est pace in three quar­ters in the three months ended De­cem­ber.

"Gov­er­nor Ra­jan was quite clear in say­ing that to main­tain com­pet­i­tive­ness you ei­ther re­duce in­fla­tion or weaken your cur­rency," said Nizam Idris, head of for­eign-ex­change and fixed-in­come strat­egy at Mac­quarie Bank Ltd. in Sin­ga­pore. Mac­quarie pre­dicts the ru­pee will fall to 70 a dol­lar by end-June, the most bear­ish fore­cast in a Bloomberg sur­vey of 34 an­a­lysts, while Bar­clays sees a de­cline to 69 and ING Groep NV to 68.50. The me­dian es­ti­mate is for the cur­rency to strengthen to 68 in the pe­riod.

Ra­jan can af­ford some de­pre­ci­a­tion with­out hav­ing an im­pact on liv­ing costs due to a de­cline in com­modi­ties. While con­sumer price in­creases quick­ened to 5.69 per­cent last month, it has halved from its Novem­ber 2013 peak of 11.5 per­cent as a slump in crude prices ben­e­fits the na­tion that im­ports about 80 per­cent of its oil. The RBI is tar­get­ing a 5 per­cent in­fla­tion rate by the end of March 2017 and 4 per­cent the fol­low­ing year.

"Given that com­mod­ity im­port prices are at cycli­cal lows and not ex­pected to re­bound any­time soon, he's seen this as an op­por­tu­nity to take the foot of the pedal on the cur­rency front," said Vi­raj Pa­tel, a Lon­don-based strate­gist at ING, among the most ac­cu­rate fore­cast­ers of the ru­pee in Bloomberg's rank­ings. "This con­firms an RBI more tol­er­ant of any near-term ru­pee down­side."

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.