Pressure on the rupee recedes

THERE'S NO CERTAINTY IF RBI WILL BE ABLE TO REPLENISH ITS FOREX RESERVE STOCKS. THE PROCESS COULD BE QUITE LONG-DRAWN

SRBI STARTS rebuilding its lost foreign currency reserves, there is an air of relief. The rupee seems to have stabilised, lending credence to the perception that the worst might be over for the external sector. Oil prices have moderated; so have prices of several other commodities, leading analysts to lower their current account deficit estimates. The US dollar’s weakening and the resumption of portfolio capital inflow, albeit at lower volatility, are adding helping hands for stabilising India’s external sector. The focus ought to be on further consolidation, to open space for both monetary and fiscal policies’ orientation towards domestic policy priorities, especially to support economic recovery.

The singular factor that made a material difference in managing the external account and the rupee was RBI’s forex reserves stockpile that, at its peak, stood at 642.4 billion. Unlike the‘taper-tantrum’ episode in 2013, the central bank appeared more confident in using its reserves to guide down the rupee ata slower pace in the recent instance, even though it exhausted more than 110 billion within a few months; a large part of this was due to valuation loss. More tactical was RBI’s additional armoury of a 65.8-billion forward position equivalent to potential reserves), which it used to meticulously intervene in the forex market for rupee support. Therefore, it is critical RBI rebuilds these reserves to prepare for future shocks.