Analysts claim that RBI may have shifted rupee intervention limit: last week in the economy

by Pavas Gupta

Last week’s economic news revolved around India, on which the world’s eyes have been ever since the rupee dipped below the 70-against-the-greenback mark the previous week. Check out the stories below to find out more about the repercussions of depreciation of the rupee, positive growth forecasts for the economy, and more:

Forex reserves witness drastic drop

In the week leading up to August 17, India’s foreign exchange reserves fell by $33.2 million to $400.847 billion, according to Reserve Bank of India (RBI) data. The primary impetus behind this drastic drop was the fall in foreign currency assets, driven by depreciation of the rupee.

The country’s currency reserves have been declining for some weeks now, as the RBI continues to sell the US dollar to contain the depreciation of the Indian rupee, which has been toeing the 70-line against the greenback.

On Friday, the rupee opened at 70.24 a dollar and closed at 69.91. The Indian fiat had hit an intra-day low of 70.40 against the USD on April 14.

India’s reserve position with the International Monetary Fund (IMF) declined by $5/7 million to $2.452 billion, stated the country’s central bank.

Moody’s: Recapitalisation plan will boost PSBs, but stress may persist

On Tuesday, Moody’s Investor Service commented on the government’s plan to provide capital support to state-owned banks, stating that such a move might improve their position, but that stress will persist.

The Centre plans to provide ?65,000 crore to Public-Sector Banks (PSBs) this fiscal, of which it distributed ?11,300 crore among five lenders in July.

“The large-scale recapitalisation plan, which was meant to improve capital buffers and loan-loss reserves and also support sufficiently strong loan growth, will now be just enough to shore up capital ratios above regulatory requirements because the banks’ capital shortfalls have grown larger than the government’s initial projection,” said Alka Anbarasu, Moody’s Vice-President and Senior Credit Officer.

The Moody’s report warns against action unaccompanied by further reform, highlighting the potential risk of the government having to continue to inject capital into banks in times of stress.

Moreover, while capital injections will enable the banks to strengthen their provision coverage, this may still not be sufficient if banks take large write-downs on the Non-Performing Loans (NPLs) they sell as part of the new resolution proceedings. An increase in provisions could raise their capital needs significantly.

SBI predicts GDP growth at 7.7% in Q1

Lending major State Bank of India (SBI) said on Wednesday that its Composite Leading Indicator (CLI) hints at a Gross Domestic Product (GDP) growth of 7.7% in the First Quarter of 2018-19.

The bank developed SBI CLI to detect early signs of turning-points in economic activity. This is done by analysing a basket of 18 leading indicators.

“The CLI is signalling that the economic activity for Q1 FY19 has picked up substantially and the GVA growth would be 7.6%,” an SBI Ecowrap report said. “However, the headline GVA is being possibly pulled down by a weak agricultural growth. Major indicators, that we found are driving GVA in Q1 FY19 are cement production, passenger traffic, the sale of both commercial vehicle and passenger vehicle, non-food credit growth and aircraft movement among others,” the report said.

RBI may have shifted rupee intervention limit, claim analysts

The Reserve Bank of India (RBI), by allowing the rupee to slide closer to its real-effective exchange rate in the midst of an emerging-market sell-down, appears to have adopted less-aggressive tactics in defending the fiat currency.

The apex bank, which actively intervened until the rupee hit the 69-level, has mostly kept to the sidelines after the currency broke past the 70 mark last week, according to anonymous  foreign-exchange traders who are familiar with the RBI’s market transactions.

Last week, policy-makers hinted at a tolerance for a weaker currency when a Finance Ministry official mentioned that a fall in the rupee should not be considered a concern given the decline in other currencies the world-over.

“Over the last couple of years, the RBI had been keen to deploy reserves whenever the rupee approached 69, but last week’s action suggests the RBI may be shifting its red lines as a result of peer currency weakness,” said Maximillian Lin, an emerging-market Asia strategist at NatWest Markets Plc in Singapore.

Rupee fall no big concern, according to Panagariya

Former Niti Aayog Vice-Chairman Arvind Panagariya has opined that the depreciation of the Indian rupee was long overdue, stating an appreciated currency value had hurt the country’s export position.

Further, Panagariya said that India’s macro-economic management was sound and dispelled any concern regarding the same. “The main news recently in the macro story is depreciation of the rupee. But this had been long overdue. The real exchange rate has seen large appreciation in recent years and this has hurt our exports,” he told the Press Trust of India (PTI) in an interview.

Pavas Gupta is a writing analyst at Qrius

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