Eyes on Budget for rupee support

MUMBAI: After RBI’s liquidity infusion into the banking system, debt fund managers and economists expect govt to propose measures that would give a boost to the rupee.
Although over the last several months even as the dollar appreciated against most currencies, the rupee was mostly resilient when compared with other competing currencies of countries like Brazil, Korea, and Turkey. It’s only recently that the rupee broke below the 86-to-a-dollar mark and had slid closer to the 87-mark. Lately it has strengthened and on Tuesday closed at 86.52 to the dollar.
Such steps could include some proposals to promote exports that would be a sentiment-booster for the rupee in the short run and bring in positive results in the long run. Budget proposals could also propose new measures to attract foreign deposits with banks and relax the interest rate cap that banks are allowed to pay on such deposits, they said. However, any massive NRI deposit mobilisation move, like the one in 2013, is almost surely ruled out, an economist with a bank said.
According to a debt fund manager, India’s currency management never aimed at targeting particular levels of currency, instead emphasis had been on an orderly movement of the currency. In that approach, monetary policy used to be an important tool, to ensure an appropriate interest rate differential to support the rupee, beside intervention in the currency market to support the currency.
Of late, however, it has been observed that RBI refrained from intervention in the currency market to avoid liquidity tightness in the money market considering domestic growth inflation dynamics. In addition to that, the central bank is also injecting rupee liquidity to ensure smooth transmission of monetary easing going forward. It is a clear departure from earlier currency management approaches.
“Banking system liquidity can be treated as an indicator of currency supply. So, the current trend of absence of dollar sell combined with injection of rupee liquidity through OMO purchase by RBI, is going to augment currency supply instead of reducing it. Hence it can be inferred that currency management through other approaches for augmenting flow are being considered instead of managing it through liquidity and interest rate tools,” the fund manager said.