Why you shouldn’t worry about the rupee falling to 20-month low

Headline inflation is also well above the 4% mark, so as soon as the RBI is reassured about growth, it should start targeting the inflation front, according to Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. Edited excerpts:


The rupee is at its lowest for almost 20 months. Yes, this is good news for exporters because they will earn more but bad news for importers, oil imports, many people who might be traveling for vacation. We are seeing the performance of the rupee and the double whammy of inflation that is setting in. Is this alarming or is it in line with what is happening in the rest of the world because we haven’t seen so many Reserve Bank interventions either?
I think there is no need to worry because if you look at the development of the rupee it has held up for a very long time despite a low trade deficit. There has been a bit of weakness in the fundamentals which is why the rupee should depreciate, but I think the depreciation is due to the rise in the dollar index and the Fed showing a much more positive intention of decrease as well as the rate. hiking. So it is consistent with what the fundamentals look like in the world. I don’t think that’s a matter of concern. On the intervention part, the RBI would also have wanted to have some clarity on how global flows or global monetary policy, especially the Fed, would play out and we’re starting to get a better idea in terms of monetary policy. We’ve had the ECB, BOE, and Fed over the past two days and now have a better idea of ​​what the global situation is starting to look like. Thus, this curbs the volatility in the movement of forex. It also gives the RBI better clarity as to whether they want to step in rather than come in and try to defend a particular level. RBI is in the best position to take a call about how to intervene and when to intervene.

There are three rates in any country: inflation, interest rates, and the exchange rate. Any central banker or government can try to control two rates, whether it is a combination of interest rates and inflation or a combination of currencies and rates. interest. The priority right now is to keep interest rates low and inflation under control, but do you think the priority now needs to change?
You are right to point out the three factors that we often refer to as the trilemma. You can’t control everything at the same time. So far, your focus is on growth. At a time when the comfort over growth comes from worry about inflation increasing. I think the RBI should focus on inflation as soon as it feels reassured about growth. If you look at the CPI basket, about 17% to 18% of it comes from global inflation. A very large basket is driven by national factors anyway, but there are obviously spillovers. Tackling inflation will become a primary target or concern early next year. This does not mean that the RBI will have to increase pension rates. All they have to do is somehow start to normalize the liquidity and normalize the reverse repo rate, and then eventually go for the reverse repo rate as they get in. comfortable with that.

If you choose these three rates, inflation will start to have a dominant effect early next year when the comfort of growth also kicks in. The exchange rate is a byproduct in a certain sense as it moves. due to the dollar, crude prices and capital flows. An interesting point would be when the inclusion of bonds occurs. There are a lot of exogenous factors that go into the rupee and it doesn’t necessarily make sense to target the exchange rate. However, if you target inflation, it has an impact on the exchange rate in the medium to long term anyway. Over the next few months, core inflation will be a concern. Headline inflation is also well above the 4% mark, so as soon as you get comfortable with growth, you start targeting the inflation front.

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