Neal Bhai Reports — RBI may Not Interfere with Rupee Now, Rumours on Devaluation Unwarranted — The Reserve Bank of India and the government would continue with their non-interference policy in currency movements as an improved balance sheet gives it a cushion and incentivises a move towards full convertibility.
Any sudden “devaluation“ of the local currency is unwarranted going beyond the debate over export competitiveness.
“Currency management is a complicated process,“ said Saugata Bhattacharya, chief economist at Axis Bank. “A currency depreciation is a disincentive for capital flows, since it reduces foreign investor returns. So, it is best to let the rupee find its value through market forces, subject to RBI and government managing undue volatility.“
“Through higher import costs, a depreciating currency will push inflation up, resulting in a need for tighter monetary policy,“ he said. The authorities have embarked on an inflation targeting trajectory, a key to sustainable rate cuts, which in turn, are perceived to spur the country’s growth. India aims to attain 4% by next financial year with a band of +2%.
Last Thursday, the currency market was rife with speculation on reports the government would devalue the rupee-dollar exchange. The local unit immediately lost value of about 0.25% to the dollar. It later erased some losses when the government denied any such move. The rupee closed at 66.98 a dollar on Friday.“The devaluation buzz this week shows the lack of understanding of the term,“ said Jamal Mecklai, head of Mecklai Financial Services. “Devaluation is a onetime cut in the price which can only happen in markets that are closed as ours was in 1990.“ “Today, the rupee may fall or rise depending on market forces. It is conceivable that the buzz was created to push for a rate cut in October,“ he said.
RBI has shored up enough forex reserves, now at $371billion from $351 a year ago. The cushion would work when there is any lumpy foreign fund outflows, be it due to the US rate hike, election or any European outcome. Any one-off devaluation will only add fuel to the fire.
“There is no reason to tweak anything on the currency,“ said Anubhuti Sahay, chief India economist, Standard Chartered Bank. “We expect the rupee to rise towards 66 per dollar by the end of the year and go further to 65.50 per dollar by mid-2017.“
— Gold Silver Reports