Blasé Capital For a Rupee More
One is really not sure about the antics, or the lack of it, of the central banks. Sometimes they behave smartly, sometimes they seem unsure, and at other times they are clueless. Possibly, it is because monetary economics, which is easy to describe in theory, as are other forms, is difficult to implement in the real world. Yes, higher interest rates will curb inflation, but do they always? Yes, low interest can spur growth, but does it have a cause-and-effect outcome? Of course, strictures can save the currency, but have they done it anywhere in the world, unless backed by improving or strong macro fundamentals? This is why it still seems inexplicable why the Reserve Bank of India (RBI) opted for the extreme measures some weeks ago to strongly protect the rupee. Yes, the rupee was down in the dumps, over Rs 95 to a dollar. Yes, the actions strengthened it to between Rs 92 and Rs 93. But what is the point? It is already more than Rs 94 to a dollar, and may soon breach the Rs 95 mark if the Iran war continues without a peace settlement.
Do not forget that the RBI has removed several of the earlier measures. In the process, it was criticised by the foreign investors, who warned that the moves were clearly anti-reforms. Indeed, the central bank had to accept and accede that the measures were temporary, and will be removed soon, as some of them were. In effect, what the central bank achieved was to hear criticism and postpone the inevitable. Possibly, this was the crucial objective, that is to delay the process and ensure that the fall is smoother, and indicates stability of the economy. This becomes more critical when one hears similar things about the strong fundamentals from varied Indian and foreign sources. In almost every report, both positive or negative, there are claims about how strong the Indian economy is, and what is happening with the rupee, Indian equities, inflation, and GDP growth are temporary trends. It seems as if there is a concerted effort to somehow string the India story towards a happy ending, even if the subplots point towards volatility.
Yesterday, the rupee opened weaker, more towards Rs 94.5 to a dollar, before it gained a bit towards the end of the day. The reason was an upward movement in the price of global crude oil, with the Brent crude hovering near USD 110 a barrel. According to a media report, “Importers are looking to hedge positions to take advantage of the current levels in case the rupee starts depreciating sharply…. The RBI is also likely intervening in the market to stem a free fall. But the central bank is unlikely to be as aggressive as it used to be, and would instead take a more neutral stance by entering the markets intermittently….” In this single sentence, we can view two trends, even contradictions. Traders, and obviously speculators, feel that the rupee may go down further, which was their feeling earlier when the RBI imposed the strictures. In effect, nothing has changed. If the RBI does not wish to aggressively stem the free fall now, why did it do it a few weeks ago? As we said earlier, things do not make sense, at least objectively.
Maybe there were other objectives that were more important a few weeks ago. The RBI, as well as the ruling regime, was being overtly and unfairly criticised for the falling rupee. Comparisons were made on memes about the state of the rupee over the past two decades. In some cases, as is normally the case, they were unfair. Despite a larger fall in terms of value in the recent past, a percentage comparison showed discrepancies, which an average reader and viewer failed to grasp. In addition, a few economists possibly goofed up when they tried to spin the yarn, and explained that a weak rupee is good for the economy. Everyone expected the rupee to breach Rs 100 to a dollar, which would have happened a week or two ago if the earlier trends had continued. The RBI was tasked to stop the decline, even if temporarily, given the social, political, business, and economic implications. The image of the central bank and nation did not matter. What was crucial was to send a strong message that India will not allow the rupee to falter, at least not for a month or so. Even later, it wants a smooth fall.
This explains why analysts are slightly apprehensive when they predict the rupee’s future. One of them, who was quoted in a media report, explained this in a technical manner, “The rupee continues to trade like a coiled spring, conserving energy before its next decisive move. The Rs 93.5-93.8 zone remains a strong demand base, where dips can get absorbed, while Rs 94.5-94.8 is expected to act as a resistance zone.” Hence, it seems that Rs 95 is the RBI’s benchmark, and the central bank will forever be careful once the rupee breaches it. But if peace does not prevail soon, and war continues, the task of the central bank will become more difficult, or possibly easy, as time moves on.
