The Reserve Bank of India (RBI) will continue to intervene in the foreign exchange market to ease the rupee’s volatility, but has no plans to hold the currency at a certain level, sources familiar with the incident said. The central bank will revise its inflation forecast in its June review, as food and fuel prices have intensified since the April forecast.
The RBI’s intervention has helped the rupee recover in the last two sessions after it hit a record low of 77.46 against the greenback on Monday. The currency has gained 22 paise in the last two sessions.
However, the central bank could not go the extra mile to protect the rupee, nor would it allow the domestic currency to slide more steeply, they added. “Both the central bank and the government want to ensure that there is no push in the movement of the rupee; The orderly movement is what they see, “the source said.
In April, the RBI sharply revised its inflation forecast for FY23 from 4.5% (pre-war Ukraine) to 5.7%, up from 6.3% in Q1. According to analysts, India’s retail inflation is expected to reach an 18-month high of 7.5% in April. However, when raising the repo rate in May, it refrained from revising its inflation forecast out-of-cycle.
Central banks around the world, facing the irresistible task of tackling trade-offs between inflation and growth, will seek to reduce demand in the coming months through tougher measures. Although input prices have risen in recent months, pass-through efforts by producers have had limited success, however, due to the relaxation of wider individual demand in selected sectors.
In a report that the RBI may have to resort to aggressive measures in the coming months to curb runaway inflation, sources said that it would first ensure gradual and gradual withdrawal of excess liquidity in a multi-year time frame in a non-aggressive manner. Only then will it weigh in on the tightening measures, if the situation permits, sources said.
The country’s foreign exchange reserves have declined in recent weeks – from 30 630 billion before the Ukraine war to 29 598 billion on April 29 – in excess of ড 598 billion, due to the “valuation loss” of foreign exchange holdings. More than any bid to hold a rupee slide, the source said.
Although the benchmark 10-year government securities yield has fallen by about 25 basis points in the last two days due to speculation that the central bank may buy government debt to put pressure on higher yields, sources said any such move is highly unlikely.
“It simply came to our notice then. The rise in G-2 yields in recent weeks has been driven by external factors (such as rising US interest rates, rising oil prices, etc.), the uncertainty of the global economic recovery and the risk of surpassing demand in the bond market, “said a source.
The 10-year G-sec yield rose 31 basis points last week after the central bank raised the benchmark lending rate by 40 basis points in an out-of-cycle action on May 4. Wednesday’s yield fell eight basis points to 7.22%
RBI Governor Shaktikant Das said last month that the central bank had provided liquidity of Rs 17.2 trillion in response to the epidemic, of which Rs 11.9 trillion had been utilized. Such arrangements worth Rs 5 trillion have been allowed to expire or be withdrawn by the end of FY22.
The RBI last month took the first set of steps in two years to normalize liquidity management at the pre-covidial level, as it introduced the Fixed Deposit Facility (SDF) as a basic tool to absorb excess liquidity from the system. Last week, the RBI raised the repo rate by 40 basis points and, as a result, raised the SDF rate from 3.75% to 4.15% in April.