Modi under pressure to curb currency slide

Modi under pressure to curb currency slide

12/09/18

Luke Foddy, Communications Manager

The Indian rupee fell to a record low against the US dollar today, prompting Prime Minister Narendra Modi to moot a potential government intervention.

The combination of a five-year high deficit, increased oil prices and emerging-markets sell offs devalued the rupee to just 72 against the dollar, Bloomberg reports, placing pressure on Reserve Bank India (RBI) to shore up the currency.

According to the Economic Times, Modi has called a review meeting this weekend to discuss possible measures to address the decline.

There are several options available to the government, including raising benchmark rates, making market interventions and increasing tariffs. It could also turn to non-Indian residents to raise foreign currency reserves, and to seek contributions from Indian nationals overseas.

However, all measures pose risks, especially given the relative fragility of Asia’s worst-performing emerging economy. This has led several commentators to suggest the best response is doing nothing at all.

“Many economists, including Shankar Acharya, Rakesh Mohan and Surjit Bhalla, have long demanded a weaker rupee to dynamise stagnant exports,” an Economic Times editorial reads.

“Any move to try and artificially strengthen the rupee today will empty our foreign exchange reserves. That will surely convince foreign investors that it is time to leave.”

Since April this year, foreign institutional investors have withdrawn 428 billion rupees, or nearly 11% of the money they brought into India’s debt market between April 2009 and March 2018, Asia Times reports.

News of a potential government intervention saw the rupee rally, but DBS Ltd has predicted a further slide to 75 rupees to the dollar ahead of new data which is expected to show that India’s deficit increased again throughout August.