History shows growth woes will override Indian rupee defence

Jul 27 2013, 15:48 IST
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A roadside currency exchange vendor is pictured through rupee notes in the old quarters of Delhi (Reuters) A roadside currency exchange vendor is pictured through rupee notes in the old quarters of Delhi (Reuters)
SummaryHistory suggests these decisions are deliberate and ultimately growth is the overriding factor.

be adversely affected, JPMorgan said.

LOSE-LOSE-LOSE?

While the RBI has not explicitly said so, its actions suggest 60-per-dollar is a line in the sand for the exchange rate. Analysts think that is a mistake.

An inability to defend that would hurt market confidence, yet a dogged battle for the level could mean the central bank compromises stability in other parts of the economy, particularly by increasing volatility in money markets.

"Stability in the rupee is what will constitute victory," said Sanjay Mathur, RBS economist based in Singapore. "That may even take a few months and the RBI may be ready for that haul."

Analysts expect stability to mean less volatility in the currency rather than a turnaround and the indications are that the central bank has not won the battle yet. Market expectations of future one-month rupee volatility are still 4 percentage points above the 7 percent levels of May.

For now, economists expect the central bank to do more of the same: discreet policy tightening through its web of open market operations.

They expect other non-monetary administrative options, such as forcing exporters to bring earnings home quickly or forcing oil importers to stagger their bulky dollar payments, if the pressure is sustained. The government is, meanwhile, examining ways to raise money from non-resident Indians.

"To reverse these measures, the RBI might need to conclude that these steps were ineffective or the costs entailed were too high or the external environment has to improve markedly," said Radhika Rao, economist at DBS in Singapore.

"We don't believe either of these will pan out in the short-term."

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