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1 month ago
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Summary
A record-low rupee and the utterances of policymakers are consistent with a shift to a lightly managed currency float. While this may cushion India against trade turmoil, it also reduces interference with monetary policy.
For the rupee, finding a floor seems to be getting difficult. On Wednesday, it slid past the psychologically-important 90 mark against the dollar to touch an all-time low of 90.29, before recovering slightly to end at 90.19. For the year, it is down about 5%.
While the Reserve Bank of India (RBI) is believed to have intervened by selling dollars, its presence was found to be fleeting, in keeping with its largely hands-off approach seen this year.
The government too seems unruffled, with chief economic advisor V. Anantha Nageswaran saying that he “isn’t losing sleep” over the rupee’s decline.
The utterances of policymakers have firmed up the forex market’s reading of a subtle shift in currency policy. With Indian exports under US tariff pressure, a weaker rupee may quietly have been assigned the role of a cushion.
While it raises India’s import bill, soft crude oil prices and our low inflation risks make that a non-issue. Low forex intervention has the additional advantage of a milder collateral fallout on rupee liquidity conditions, thus letting monetary policy operate more freely. Rupee support has a tightening effect, unless other tools reverse it, and that may go against RBI’s neutral stance.
English (US) ·