IDFC First Bank's Chief Economist Gaura Sengupta expects some relief for the Indian rupee as in the fourth quarter the domestic unit improves. Trade deficits narrows, flows from balance of payments also improve.
In case a trade deal between the US and India gets announced, it will give a temporary relief. Then, the depreciation should resume, she said.
The Indian currency is facing pressure because of the capital outflows. There is a sharp slowdown in capital inflows to India. The Balance of Payments is showing a negative $11 billion in July–September versus the usual surplus number, she said.
On Wednesday, during the session, the Indian currency slumped 42 paise to a record low of 90.30 against the US dollar.
Even RBI Has Limits
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.
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