India: Authorities accommodating INR weakness - ING

Prakash Sakpal, Economist at ING, points out that the INR’s 8.6% year-to-date depreciation is the steepest among Asian currencies, of which 7% has occurred since April.

Key Quotes

“A $20 billion fall in foreign exchange reserves in the last four months to $404 billion through July is a testament to the RBI’s presence in the market to support the currency.”

“This is still a sufficiently large stock of reserves, though the authorities concede that any intervention will not do much to stabilise the currency when it’s due to global factors.”

“And with local factors also kicking in now, it might take a more aggressive policy response to rein in INR weakness. Just as in other Asian countries (Indonesia and Philippines), a weak currency was the principal force behind two 25 basis point RBI policy rate hikes in June and August.”

“Will the RBI follow central banks in Indonesia and the Philippines in pursuing aggressive policy tightening? Or, on the contrary, will the central bank take the currency weakness in stride as a factor required to curb imports and the trade deficit, even though this would also be inflationary. This poses a significant policy challenge for the RBI going forward.”