RBI's Continued Battle Against Depreciation Pressures

CEIC India Data Talk: The announcement by the U.S. Federal Reserve (Fed) that it plans to taper its quantitative easing programme has seen the mass reversal of capital inflows into India as investors remain wary about the global economic recovery given the possible absence of cheap liquidity. This was exacerbated by persistent current account deficits, widening slightly to USD 21.77 billion during the second quarter of 2013 from USD 18.08 billion during the previous quarter, along with domestic weaknesses – including the lack of necessary infrastructures and legal and regulatory frameworks. Sharp depreciation has prompted the Reserve Bank of India (RBI) to respond with a net sale of foreign currency amounting to USD 2.25 billion in June 2013 – escalating to USD 5.98 billion during July 2013 – to contain volatility in its foreign exchange. The RBIs outstanding net forward sale of foreign currencies declined sharply to USD 4.91 billion during June 2013 from USD 5.80 billion during May 2013. These interventions coincided with further reduction of India's foreign exchange reserves, which amounted to USD 275.49 billion during August 2013, after having declined for four consecutive months from USD 293.89 billion during April 2013. While the impact of the Fed's tapering announcement was initially muted on India's call money markets, following the RBI's major intervention on 15 July 2013 – which included a sharp increase in the Marginal Standing Facility Rate (MSF rate) to 10.25% from 8.25% prior to the interventions – the call money market rates started rising sharply during July and August 2013. The weighted average call rates in the money market rose to 7.76% from 7.24% during June 2013. This was followed by a further increase in the weighted average call rates to 9.90% and 9.97% during August and September 2013 respectively. However, following the RBI's subsequent move to scale back its exceptional intervention (lowering the MSF rate gradually to 9.5% on 20 September 2013, 9.0% on 8 October 2013 and 8.75% on 29 October 2013), the weighted average call rates declined to 9.03% as of October 2013. The Fed has recently announced that it may hold off its planned move to taper its asset repurchase programme, contingent on more evidence of improvement in the U.S. economy; that provides a temporary reprieve for some emerging markets, including India. However, while this gives the RBI some leeway to manoeuvre, given that the currency depreciation in India is a complex product of both external factors (the aforementioned weaker global economic recovery) and domestic factors (most notably political uncertainties surrounding the forthcoming elections in mid-2014), the RBI will be put to task to manage these in light of the changing domestic events. Indeed, the threat of further depreciation on the Indian rupee has only been partially allayed, rather than mitigated. By Chan Yee Lui Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
6th November 2013 RBI's Continued Battle Against Depreciation Pressures