By Elton Gomes
The government continues its efforts to restore investor confidence, with the RBI taking measures to ease liquidity for lenders a day after the Centre raised import tariffs to support the declining rupee.
The coordinated policy between the Centre and the RBI (Reserve Bank of India) comes as India’s economy faces the challenge of elevated oil prices and a falling rupee to the debt crisis at a lender and a cash crunch in the banking system.
Foreigners have pulled $8.6 billion from local shares and debt in 2018, thus increasing the weakness in the currency that’s already Asia’s worst performer. The coordinated measures might not be of significant help in saving the declining rupee.
What step has the RBI taken
The RBI allowed banks to dip further into statutory liquidity reserves in order to help them meet their liquidity coverage ratio needs, a step that would boost cash available for lending. On Wednesday, the government hiked import taxes on $12 billion of goods in an attempt to reduce the current-account deficit.
Will it be effective?
The measures announced are positive on the margin in the short term but not really game-changing stuff to reverse the trajectory of the rupee and the financial markets, said Ashish Vaidya, head of trading at DBS Bank Ltd. in Mumbai, Bloomberg reported.
Have other measures been effective?
Recent measures to save the Indian currency have been weak and pressure is building on the authorities to take more comprehensive steps to narrow the current-account deficit.
India’s move to raise import tariffs on 19 items comes after similar steps were taken by Indonesia, which also runs a current-account gap.
The additional duties will not serve to reduce the current-account deficit by more than 0.2 per cent of GDP, said Teresa John, an economist at Nirmal Bang Equities Pvt, as per the Bloomberg report.
The increases are most likely to be countered by the recent increase in oil prices to above $80 a barrel, John said, forecasting that the rupee is likely to witness a further decline.
Government steps in to rescue sliding rupee
A week back, the government announced measures it intends to take to prevent the rupee from sliding further and address the widening current account deficit.
The measures were aimed at changing sentiment and building on the recovery toward the end of last week. The government announced five measures to curb the further decline of the rupee. The government measures, however, did very little to stabilize the market. On September 17, the rupee opened lower and was trading over 72 a dollar, thus continuing its decline.
Economists believe the government’s steps have only had a limited short-term impact. In fact, HDFC Bank, India’s largest private sector lender, believes that the measures could even be negative in the long run.
Elton Gomes is a staff writer at Qrius