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Mumbai: Raising the interest rate and burning billions of dollars in foreign exchange reserves did not do much to reverse the rupee's position as the weakest currency in the world. Asia this year. If things get worse, India could turn to other weapons in its arsenal, economists say.
With the current account deficit widening, thanks to rising oil prices and outflows of bonds, the rupee could weakness after it plunged to a record of 69.0925 against the dollar last month. The currency gained 0.1% to 68.7725 Wednesday
Here are some of the measures that policymakers might consider if it were to happen:
Raising Rates
The Reserve Bank of India (RBI ) rose rates for the first time in four years in June, and is expected to follow in the coming months, prices in the swap market show. The central bank does not target the exchange rate and allocates any rate to its goal of containing the price increase.
"She may not admit it, but one of the reasons for this rise is to maintain stability on the rupee front." Said Rupa Rege Nitsure, chief economist at L & T Finance Holdings Ltd. in Mumbai.
India is not alone in raising rates in Asia. Indonesia has aggressively raised rates in recent months, while the Philippines has tightened its policy by seeking to support their currency.
Intervention
The RBI is suspected of intervening regularly on the foreign exchange market. Kotak Securities Ltd. estimates that the central bank has probably intervened in the currency futures market for $ 2.5 billion in May – the highest of all the months since the beginning of the year – and $ 2 billion in June . This compares to $ 3.6 billion for the entire January-April period, according to RBI data.
On the spot market, it intervened to more than 8 billion dollars in April and May, according to the central bank. India's foreign exchange reserves have fallen to $ 406 billion, of which nearly $ 100 billion in short-term debts, badets that the RBI considers hot money and that can leave the country at any time.
The commercial war is the new weapon in the city. India, with its previous experience of using higher tariffs to reduce imports, could use it to reduce the current account deficit.
In 2013, India increased its import duties on gold bullion and jewelry. Entries decreased, helping to reduce the current account gap. This time, imports of electronic products have outpaced gold.
Non-residents
One of the last resort will be to turn to wealthy non-resident Indians to replenish their precious foreign currency reserves. This option was exercised in 2013.
Indranil Sen Gupta, Indian economist at Bank of America Merrill Lynch, says that if capital flows do not come back, the RBI will have to sell $ 20 billion to finance a current account deficit of 2 , 4% of the gross domestic product. In addition, authorities may have to rely on non-resident Indians.
The sale of non-resident Indian bonds to raise $ 30 to $ 35 billion is what Gupta expects if the rupee crosses 70 percent without any reversal of foreign portfolio flows. ] Secretary of Economic Affairs, Subhash Chandra Garg, said that India had this option and a sovereign bond issue.
Fighting Panic
Verbal intervention is always an option. While the RBI said it does not target any level for the exchange rate, Garg said that India had enough "firepower" to cope with the decline of the rupee.
Rajiv Kumar, Vice President of the NITI Aayog think-tank the rupee was overvalued at a real effective exchange rate. The trade-weighted real effective exchange rate of 36 countries fell to 115.31, according to central bank data. A year ago, this index was at 119.13, with a level above 100 suggesting an overvaluation, while a lower level suggests undervaluation.
Madan Sabnavis, chief economist at Care Ratings Ltd., said the rupee would be driven by trade wars, sanctions against Iran, oil prices and Fed rate decisions . "The rupee will be tested at each interval."
First published: Thu, 12 Jul 2018. 11 12 pm IST
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