History shows India's growth worry will override Re defence
When the rupee hit a record low on July 8, the Reserve Bank of India (RBI) withdrew cash from money markets, making bets against the currency significantly more expensive.
July 27, 2013 / 11:43 IST
If one thing is clear from India's impulsive strategies this month to defend a plunging currency, it is that the Reserve Bank of India's policy bias towards supporting growth is innate, even in a crisis.
Also Read: RBI shows resolve on rupee ahead of key debt saleWhen the rupee hit a record low on July 8, the Reserve Bank of India (RBI) withdrew cash from money markets, making bets against the currency significantly more expensive. It intervened to stop the currency from dropping beyond 60 per dollar and at the same time tried to assure investors the shock measures were temporary.To most RBI watchers, this amounted to a menu of stop-gap measures that failed to account for lasting pressure on the currency. To the RBI, it was doing enough to support the rupee without tightening cash conditions so much that it threatened the longer-term growth of an already weak economy.The eye on growth means it has avoided following its emerging market peers Indonesia, Turkey and Brazil, who all raised their policy rates in anticipation of a long spell of capital outflows as the United States prepares to tighten policy.It is unlikely to raise rates either on Tuesday, when it reviews policy, even though analysts argue it should do so if it wants to signal its determination to attract foreign funds and defend the currency.History suggests these decisions are deliberate and ultimately growth is the overriding factor.The rupee has fallen 33 per cent against the dollar since 2007. As recently as 2010, the RBI's reluctance to raise interest rates for fear of affecting growth allowed inflation to remain at near double-digit levels for two years."The right approach would have been to move the official policy levers," said Rajeev Malik, senior economist at CLSA in Singapore.Malik feels the RBI might be hoping a temporary tightening of money markets will stabilise the rupee. And that the RBI is either too optimistic or it is wary of announcing a turn in monetary policy."Ultimately, at least how I see global liquidity developing, it will be a lose-lose proposition," he said. "India will suffer a GDP downgrade and the rupee will also break 60 in a sustained manner. They have boxed themselves into a corner."To be fair to the RBI, the country's balance of payments problems are beyond its control.India has historically been a capital-starved economy, with imports and foreign debt servicing bills that far exceed revenues. Capricious governments have done little to ensure a steady stream of foreign investment flows, and India remains one of the most difficult countries in which to do business.No wonder, critics say, that the current account deficit has blown out to a record 4.8 percent of gross domestic product, or about USD 88 billion, in an economy whose growth has slowed to a decade low of 5 percent and where consumer inflation is nearly 10 percent.Collateral Damage"Yes, exchange rate stability is the focus now in the short-term," said a RBI official, declining to be named as he was not authorised to speak to the media. "But that is because, in the long-term, we want to protect growth for which we have to focus on the exchange rate in the short-term."That view point was backed up by country's chief economic adviser, Raghuram Rajan, who told a television channel on Thursday that policy measures were geared to stabilising the currency with "minimal damage" to growth. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
