Mumbai: India’s central bank has said a stronger currency will help contain imported inflation, signaling it may tolerate gains in the rupee as it tries to curb price pressures in an economy headed for recession.
The Reserve Bank of India, which has stayed away from intervening in the currency market in recent days amid lumpy inflows from abroad, went a step ahead on Monday by explaining its viewpoint: “the recent appreciation of the rupee is working towards containing imported inflationary pressures.”
It’s a departure from the usually reticent central bank, whose comments on the currency are limited to how the RBI is committed to not letting volatility hit the rupee and how it has no target for the currency.
The RBI’s apparent comfort fueled Tuesday’s 1% rally for the Indian currency, after advancing 2% last week. Analysts said that allowing the rupee to strengthen will give the RBI some leeway to keep monetary policy easy.
“The RBI’s comment shows the central bank is comfortable with the current appreciation trend of the rupee and will likely tolerate more appreciation in the period ahead, from an inflation-targeting perspective,” said Kaushik Das, chief India economist at Deutsche Bank AG in Mumbai.
India’s six-member monetary policy committee last month decided to keep interest rates unchanged after headline inflation surged past the upper limit of its 2%-6% target band. Minutes of that meeting showed Michael Patra, deputy governor and an influential member of the panel, was in favor of rolling back easy monetary conditions should inflation not ease back to the desired range.
A working paper Patra authored more than two years ago showed that a 1% move in the exchange rate translates into a 15 basis point change in headline inflation. The impact from the currency fluctuations is passed on to headline inflation over a period of five months, according to the paper.
The RBI’s absence from the currency market has also fueled speculation the central bank is trying to ensure easy monetary policy measures continue to support faltering growth by getting a better grip over inflation. Much of the price pressure is because of supply shocks in an economy that contracted by a record 23.9% last quarter following a harsh lockdown to stem the coronavirus’s spread.
“It now appears that the RBI has selected this as the more effective tool to address aspects of the current inflationary episode, while ensuring that monetary policy tools continue working towards mitigating the growth risks,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. in Mumbai.