Why is the Reserve Bank of India so quiet on the rupee?
When nobody’s listening, sometimes it pays to shout from the rooftops.
Based on the rupee’s daily pasting, the Reserve Bank of India might do well to look to the European Central Bank’s strong verbal defense of the euro just over a year ago.
In July last year ECB President Mario Draghi declared he would do “whatever it takes” to safeguard the euro’s existence.
That unexpectedly candid comment, uttered at a moment of rising market tension, wasn’t followed by concrete policy action. But markets took heed.
Sovereign bond yields in peripheral countries plunged from danger levels and the euro has rallied 10 percent since then – 8.5 percent by the end of last year.
Turn to the free-falling rupee.
It has plunged by 14 percent since the U.S. Federal Reserve signalled in May that it would soon have to slow the pace of its extraordinary monetary stimulus, which has triggered a rush of foreign investors to sell emerging market assets.
The RBI has been tweaking policy at the edges to stop the fall but keeping mostly quiet. Incoming governor Raghuram Rajan doesn’t check into work officially until September 5.
Last month, the central bank drained money market liquidity to tighten short-term rates and then, apparently changing tack completely, it announced on Tuesday it would buy long-dated bonds worth $1.2 billion.
Dariusz Kowalczyk, economist at CA-CIB in Hong Kong, argues in a note that the RBI’s stop-start steps in micromanaging policy has been done “using language that casts doubt over its resolve to…defend the Indian rupee.”
But the rout has accelerated in recent days.
In a Reuters foreign exchange poll taken two weeks ago, the most pessimistic view was for the rupee to reach 65 against the U.S. dollar by January 2014. It crossed 65 on Thursday.
Deutsche Bank said this week the currency could touch 70 to the dollar soon.
The real challenge, however, is firepower. India’s central bank only has about seven months worth of imports in currency reserves.
Amy Yuan Zhuang, analyst at Nordea in Singapore, says:
Draghi probably has more credibility in markets … and none of the emerging market central bankers can match up to it.
The RBI needs to have a single-minded focus, either on inflation, or the currency or financial market stability — instead of trying to do different things together, only to achieve nothing.