Inflation, CAD: RBI’s moves to stabilise rupee face hurdles

NEW DELHI: The Reserve Bank of India’s moves to liberalise foreign exchange inflows are unlikely to offer much immediate support to the floundering rupee as inflation pushes higher and the current account deficit threatens to balloon towards multi-year highs.

The RBI announced a slew of measures on Wednesday to bring in a fistful of dollars, including allowing overseas investors to buy short-term corporate debt and opening of more government securities under the fully accessible route.

The steps came after the RBI’s foreign exchange reserves fell by more than $40 billion over the past nine months, largely due to its intervention in the currency market to curb rupee losses.

Still, the rupee has depreciated about 6% against the dollar so far this year, and some analysts say headwinds facing the Indian economy are ominously reminiscent of the 2013 taper tantrum crisis: inflation is at multi-year highs, both current and fiscal accounts are under stress, and there are heavy portfolio outflows amid tightening global financial conditions.

The partially convertible rupee rose as high as 78.8950 per dollar on Thursday compared to its previous close of 79.3025 in response to the measures, but didn’t hold onto the gains for long. It was trading a little stronger at 79.24/25.

With inflation expected to keep pressure on the RBI bank to raise rates, foreign investors are expected to wait and watch before taking investment decisions.