Rupee May See Some Ease In Depreciation Pressure In Fourth Quarter, IDFC First Bank's Gaura Sengupta Says

The Reserve Bank of India is facing the impossible trinity. The central bank either needs to choose between monetary policy or a stable currency. Wisely, it has chosen the monetary policy, Sengupta said.

The less they intervene, the less will be the strain on foreign exchange reserves and as well as on the banking-system liquidity. When RBI buys the rupee, the liquidity dries up in the domestic banking system. So, the less the RBI hides the depreciation pressure, the more freedom it gets on the monetary policy front, she said.

From a long-term perspective, it is also a sustainable strategy because RBI has a limit too. The central bank does not target a particular level, which is proven from the pace of depreciation. This calendar year, the rupee has depreciated 5% year on year compared to the usual 3–4% decline rate. So, the RBI is allowing the rupee to depreciate maybe because of the tariffs, according to Sengupta,

The intervention strategy is showing that the central bank has limitation. Last year, the rupee emerged as the most stable currency globally because of the central bank. However, it came up with a cost as short-dollar forward books built up. This calendar year, the RBI does not have the forward book as a tool to sterilise intervention as it does for spot markets, she said.