RBI Governor Has Instilled Confidence
Amid a not-so-sure Fed and BoE flung off the track, RBI Governor Shaktikanta Das' speech comes as a great deal of reassurance.
RBI Governor Shaktikanta Das does not want to infuse liquidity, but he certainly has instilled confidence. In the backdrop of the storm stirred by the not-so-sure Federal Reserve and the reckless fiscal announcements by the Truss government that flung Bank of England off the track, Friday's speech comes as a great deal of reassurance from the governor.
The most important part of the governor’s speech was the one on foreign currency management. The last couple of months have witnessed a strong dollar-led disruption to financial markets. Most currencies have depreciated substantially. As the governor pointed out, the dollar appreciated by about 14% but the rupee depreciated by about 7%. This demonstrates resilience. But this can’t be achieved without an active and nimble-footed central bank stepping in and out of the ring.
Central banks are always hit by twin devils—depleting forex reserves and depreciating currency—whenever global financial chaos are triggered by actions of other central banks.
Das cleared the air on this critical aspect. Forex reserves at $537.5 billion are down. But the fall is largely due to revaluation of reserves, about 67%. Taking into account the net accretion to the reserves of about $ 4.6 billion, the spend on defending the rupee doesn’t appear to be large contrary to general fears. Market intervention continued to be judicious, he pointed out.
A confident governor implied that preserving forex reserves is more important than defending the rupee. The latter is more to do with managing volatility. Preserving the forex is key to ensuring we can cushion any untold shocks of the kind we have witnessed over the last few weeks.
A rate hike of 50 basis points, reducing liquidity and watching data is par for the course and, at the same time, not going by the textbook approach is practical. Clearly, this shows the renewed confidence our markets have in the RBI.
We have yet again demonstrated that India’s systems and practices and checks and balances are far more stronger compared to many other monetary systems of the world. As in the past, India will be able to emerge with minimum bruises and bounce back faster than many other countries. No wonder, FIIs are trotting back to Indian shores.
It’s not just repo reloaded, but growth reloaded!
Muralidhar Swaminathan is Consulting Editor at BQ Prime.
