Tuesday, 24 May, 2022
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Why growth of India’s forex reserves is set to slow after new RBI measures

RBI seeming to opt for a hands-off approach, which could lead to faster appreciation of rupee. On Tuesday, the currency posted its biggest single-day gain in 21 months.

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Mumbai: In its biggest single-day gain in 21 months, the rupee surged 75 paise, or 1.02 per cent, against the greenback Tuesday to breach the psychological 73-a-dollar mark, ending the day at 72.87-a-dollar as compared to its previous close of 73.62.

Why did the rupee gain 1% Tuesday?

While the gains come after a strong run in August, with the domestic unit performing as the second-best currency in Asia, the Tuesday surge can be attributed to what is being seen as the Reserve Bank of India (RBI) opting for a hands-off approach by allowing the currency to strengthen, apart from healthy inflows and a weak dollar.

The central bank, in its statement Monday, announced measures to cool down yields on sovereign bonds, saying, “The recent appreciation of the rupee is working towards containing imported inflationary pressures.”

This marked a shift from its earlier approach and pushed the rupee immediately.

Also read: 4 questions Indian economy faces after the record Q1 GDP slump

What is RBI’s forex rate management policy?

The central bank doesn’t disclose its foreign exchange management strategy, but it was evident in the last few years that the rupee was not allowed to appreciate despite healthy inflows, resulting in a rapid build-up of foreign exchange.

From a low of $275 billion in September of 2013, when rupee came under severe pressure due to so-called ‘taper tantrums’ by the US Federal Reserve, India now has record foreign exchange reserves of $537 billion, as on 21 August — a 95 per cent rise over seven years.

Despite the Covid-19 pandemic, the foreign exchange kitty swelled by $62 billion since March.

In this seven-year period, rupee ended the year with an appreciation against the dollar only once — in 2017. In the last two years, the rupee ended weaker by 8.45 per cent in 2018 and 2.26 per cent in 2019. This year, the rupee is so far down by 2.04 per cent against the dollar.

What is the change that was made to this policy?

The latest RBI statement suggested that it is not uncomfortable with the appreciation in rupee, confirming the speculation among currency analysts that a departure was made in the exchange management policy.

In other words, going forward the central bank may not intervene in the foreign exchange market aggressively to mop up the dollar and slow the domestic unit’s pace of gain.

“The sharp drop in USD/INR since 24 August has spurred discussions over whether the RBI is turning less aggressive in its accumulation of FX reserves,” Nomura said in a note to its clients.

“We believe there are factors that could have spurred a change in the RBI’s approach, including the level of reserves and adequacy, a desire to mitigate inflation, the liquidity impact of unsterilized foreign exchange interventions, the prospect of smoother inflows and potential INR [rupee] undervaluation,” the note said.

Also read: Jolted by Q1 slump, economists rush to further lower GDP forecast for fiscal 2020-21

What forced the shift?

The recent trend in consumer price index-based inflation, which has stayed above the mandate of 6 per cent for two consecutive quarters as well as the first month of the third quarter, has worried the central bank.

The central bank is answerable to Parliament if it misses the inflation target — 4 per cent with an upper and lower tolerance band of 2 per cent — for three consecutive quarters.

Currently, with the policymakers facing the challenge of supporting growth, which is expected to be negative in 2020-21, the central bank won’t be able to hike interest rates to contain inflation.

So, the central bank is now acknowledging that it can at least control imported inflation by allowing rupee to appreciate.

As long as inflation stays elevated and growth fragile, the changed currency management stance could be expected to stay.

Why this change could result in slower forex reserves growth

Since the rapid rise in foreign exchange reserves over the last few years was mainly due to aggressive intervention by the central bank, the latest move could also result in a slow build-up of foreign exchange reserves.

The central bank could draw comfort from the fact that its reserve adequacy is nearly three times the requirement and is one of the highest among other Asian economies.

Also read: Global trade seen recovering faster from pandemic than after 2008 financial crisis


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  1. Many in the West express genuine and artificial amazement at the India Economic Story, which is steered by the RBI, id.,est,the Robbers and Barons Of India.dindooohindoo

    The Job of the RBI is NOT to maintain price stability or peg the rupee or print the INR.INR is printed all over the world from BKK to Lagos.With 400 Billion USD anyone can peg the INR to anywhere they want.The Purpose of the RBI is to protect the Robbers and Barons of India, id.,est., Banias,Brahmins etc.,

    to enable them to loot the Indian People,on the pretext of new business ventures,to keep the wheels of commerce moving,and thus,ensure,a pittance of jobs and excess production capacities.Further,there is no agri policy in India – except to ensure the disaster of over production,to depress agri farm gate prices, which is to ensure that the input costs for the Robbers and Barons of India and the food costs of the middle classes,are as low as possible – at the cost of the misery,pain and blood of millions of farners.

    Since the Robbers and Barons of India,being bania and brahmin weasels and vermin, are INHERENTLY incompetent,they need various subsidies and protection in form of import duties and tax sops – and the biggest sop is the Indian Agri Policy, which is designed to kill farmers and REDUCE the costs of the Banias.

    How does the RBI protect the Robbers and Barons.The Indian Banking system does not do any commercial banking.It is a VC enterprise,which lends to ultra-high risk activities,id.est FRAUD.

    Let us say Mr A starts a business B and then takes a bank loan from a Private Bank Say HDFC bank – and then steals the money.Then what ? Then The RBI gives him the key to the door of a lower tier Private Bank,like Axis Bank – say,for working capital funding (after sinking the term loan – by diversion and over- invoicing).This money is also eaten up by A.

    Then A goes to a 2nd tier state owned bank – but by now his name is flashed ONLY In the banking system.So he floats a new trading cum manufacturing company called D,and starts the entire process again.Within 1 year,he digests this money also. Then he targets the STCIL,MMMTC and MSTC and PEC to get merchant financing for transactions, as a trader or an associate and he rips them off also.

    Now,the beauty is that all these Banks and other agencies,have more than Rs 900000 crores of such OUTRIGHT FRAUDS and Mr A has positioned him at a scale and a type of fraud which is far less than the rest and so,Mr A is NOT a Priority for the bank or the legal system.Now Mr A has to be creative.So he taps his trusted suppliers and other participants in the supply and value chain of Business B and D, to raise working capital loans from new banks, based on bogus financial statements – and now Mr A has a cartel – of partners in crime.So Mr A is a seed VC, who has tried and tested the banking system,and placed his confidants in a position to loot money on his behalf – who will follow the same pattern as that of Mr A

    Then Mr A moves to the last tier of the Indian Banks,which is the Cooperative banks and Societies – a perpetual black hole.Here he has to just share the loot with the bank board and the local neta.The bank will be bailed out by the state – else,there will be civil war.

    The genius of the RBI is that the Indian Public does not know the names of the companies, shareholders and directors of these FRAUDULENT BORROWERS.The RBI says that it is a State Secret.The purpose is to ensure that these Robbers and Barons,can keep the Ponzi scheme working,y ripping off as many institutions,suppliers and public as possible.

    Now Mr A has invested the stolen 1 Billion USD, in land or gold or stocks and in 10 years, it is worth say USD 3-5 billion, and he now wants to “get back in the gane”.So what does he do ? He dials the banker and asks for a CDR/OTS,and the banker thinks that an angel has descended from the pole star.The entire bank staff stands in line with garlands and does bharatnatyam when Mt A descends in his Chariot.

    Mr A has the interest halved or waived,has the principal loan converted into equity and then uses his OWN 3 Billion USD to route it through some FII or entrepreneur (say USD 100 million) to be a partner in the CDR.He also secures some tax concessions for the old plant.

    People say ,Y did he wait for 10 years ? Simple – in 10 years, the demand of the products outstripped supply and the Indian economy and banking was busted and vulnerable.

    Next day,it is the top wired news across the world and a case study, for the WB and IMF and Harvard.

    But what of Company D ? Mr A says that he has redeemed his sins.So he lets the company be taken over by ARCIL, and uses his links with Netas to force some PSU to PURCHASE THE ASSETS OF CONPANY D, at the WDV and pay off the loans ! WONDERBAR ! Now Mr A will get a Bharat Ratna and be the talk of the Robber Community for decades.

    But Mr A has to get back his 100 million USD in the CDR – and so,within a year he does an IPO,and his so called partner, exists his 100 Million at 150 Million,and pays 145 million in cash back to A,and Mr A sells of 5% of the entire equity of his company B,and then,he is off to a Greek Island with the female beaus of Adnan Orkut

    All the above,is a part of the Indian GDP.

    This is the Indian Economic story and the RBI – which is based on lies,cheating and fraud – and which was blown wide apart by COVID.

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