Can RBI's Arjuna shot save the rupee?
Dear Readers,
As the year comes to an end, I’m sure you’re looking forward to setting your email auto-reply to say, 'I’m on holiday'. Where are you going? What are your plans? These are common questions in office corridors. However, there’s a slight challenge many of us may face if we’re travelling abroad this Christmas. Your budget could shoot up due to the rupee's continuous depreciation, hitting new all-time lows against the dollar. Some analysts even estimate it to touch 86.5 against the greenb ack in the next few months. This implies that you will have to pay more.
While the Reserve Bank of India (RBI) is trying hard to stem the fall, to what extent the central bank will succeed and whether the rupee will continue to slide are big questions. Incidentally, today is the Monetary Policy Committee meeting. While economists have no big hopes of a repo rate cut, the possibility of a CRR (cash reserve ratio) cut is high today. However, the most critical factor would be the RBI governor’s view on the falling rupee.
RBI sold dollars
RBI governor Shaktikanta Das has many times stated that the central bank has enough tools and will use them appropriately as and when needed. To make it far more specific, Das used an analogy of Arjuna, the warrior from Mahabharata, saying, "We have Arjuna's eye on inflation…" However, inflation has now jumped out of the RBI’s safe zone.
Incidentally, the rupee has been sliding without any break. To compound matters, gold reserves are also falling. This made the RBI take a bold decision. It took Arjuna’s shot on the US dollar to save the falling rupee. The RBI sold more than $47 billion in the forex market within the last two months. This is the first time the central bank used such big gunpowder.
But has the RBI made a wise decision? Currency experts like Jamal Mecklai carry a view: The RBI should let the rupee float.
“It’s more than time that the RBI gives up on its incomprehensible and dangerous balancing act and gives the rupee some more room to float,” Mecklai says.
Why is the rupee falling?
The Indian currency has fallen from 83.60 on September 5 to 84.32 on December 5 in the last three months. The rupee is under tremendous pressure due to various reasons. Broadly when the economy is flourishing the currency also remains stable and ascends. But the Indian economy is showing mixed signs. While the macro factors and economic indicators are showing greater signs of improvement, domestic demand is still under the cloud. India Inc's quarterly profits have declined, FDI has dropped 60% lower and foreign portfolio investors (FPI) have sold more than $12 billion worth of investments in the last few months and the FPI holding of the Indian stocks has hit a decadal low. On the other hand, private capex is still moderate.
Majorly, the dynamics of the global economy changed when Donald Trump was elected as the president of the US. Trump has yet to take charge, but his comments on social media have created ripples in the global market.
Trump’s tariff plans have given migraine to Mexico, Canada, China and India. Indian manufacturers will be squeezed once Trump stamps his tariff plans unless they find other geographies. Trump has also threatened BRIC countries as they are working on creating alternatives to the US Dollar. This will also hit India's efforts to internationalise the rupee.
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Mecklai believes that the reason behind the pressure on the rupee is Trump’s MAGA (Make America Great Again) and hence RBI should take a rational approach.
“The impact of all this on India is that it is exposing the RBI’s flawed approach to managing the rupee. Growth is sharply down – 5.4% in Q3, as compared to 6.7% in Q2, well below expectations of 6.5% and the lowest in seven quarters; inflation, at 6.21% in October, is the highest in a year, and is up from 5.49% the previous month and well above forecasts of 5.81%; and, most relevant in this context, the foreign currency reserves are collapsing,” he said. In short, challenging times ahe ad.
What are we waiting for?
The RBI has already made a bold gambit, now what next, will it continue to stem the rupee fall? Will the situation change? Will the rupee stop falling? These are the questions that everyone has, but what strategy RBI embraces henceforth to shore up the Indian currency is going to be the talk of the trade and finance world.
The central will have to deal with the global economy and India should not enrage the US unless there is a strategy. I believe dealing with America is different than dealing with Trump.
This week, in major developments, Lok Sabha passed the Banking Amendment Bill, click here. Devendra Fadnavis took oath as the Chief Minister of Maharashtra. We are writing year-ender articles, which will analyse the events of 2024 for you, and set the tone for the next year.
As usual, I am adding here the top 5 stories of the week, trust you will find them meaningful.
Happy Reading.
Amol Dethe,
Editor,
ETBFSI.
A Communicator by profession and an artist by passion.
2wInsightful Amol... thanks for sharing 😊🙏
CEO - MapMyFinance | CA (India) | CFA (USA) | CPA (Australia) | Ex-JPMorgan
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Board Member - Pepper India Advisors, Sr. BFSI Consultant - IT Cart, Business Consultant -Perry Johnson, Head of Business Devlop. - Pepper Advantage. Vice President - ING Group, Dy. Vice President - HDFC Bank.
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