In this scenario, RBI’s decision to swap currencies will increase liquidity and control appreciation, Murthy Nagarajan says to Financial Express Online.
The Reserve Bank of India’s recent decision to inject $5 billion through foreign exchange reserve swap has been taken to help banks quickly cut interest rates in line with the monetary policy. The move would not only improve the liquidity and monetary transmission in the economy, but also help controlling the currency appreciation, says Murthy Nagarajan, Tata Mutual Fund’s Head-Fixed Income.
He also suggests ways to improve the monetary transmission further, and in an exclusive interview with Financial Express Online, also charts a way forward in order to improve the monetary transmission further.
India has current account deficit of 2 per cent, commodity prices are low and brent crude prices are trading below $70 a barrel. Dollar inflows in India has increased with global economy is showing signs of slowdown and perception of a stable government at the centre. In this scenario, RBI’s decision to swap currencies will increase liquidity and control appreciation, Murthy Nagarajan says to Financial Express Online.
Explaining in detail about the reason for increased inflows of foreign exchange, Nagarajan noted that a strong rupee could cause a disarray in economic fundamentals. “One of the factors for these flows is due to high interest rates prevailing in India. These flows can lead to strong rupee and cause misalignment with Indian fundamentals,” he said.
The RBI’s decision has been taken amid rising doubts about banks passing on the benefit of 25 basis point reduction in the policy rate by the RBI. Suggesting a way ahead for further improvement in policy transmission, Nagarajan said that for the monetary transmission to be effective, RBI should ask banks to link their lending rates and deposit rates to the repo rates prevailing in the economy. “If borrowing rates and lending rates are made floating and benchmarked to the repo rates, monetary transmission in the Indian economy will be quicker,” he said in the interview.