Method in madness? Why RBI, govt not acting tough on rupee

Method in madness? Why RBI, govt not acting tough on rupee


Macro factors for India have been under pressure during the first half of FY2019. Among currency, current account deficit and fiscal deficit, it may be worthwhile in the shorter term to focus on the fiscal deficit.

From a currency perspective, the rupee may be just correcting to its fundamental level after a period of over-valuation. In fact, the rupee seems to be more or less at its fundamental level at this stage. It can overshoot its fundamental level on heightened concerns, but that may be the appropriate reason and time for RBI and the government to explore intervention.


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There may not be a need to take any extraordinary measures to support rupee at this juncture. The government and RBI may want to keep tougher options like interest rate hike and NRI bond for later, just in case India’s macro fundamentals were to weaken further.


There are potential risks to the macro position based on further weakness in sentiment for emerging markets from possible escalation in China-US trade issues with both imposing tariffs on mutual additional imports, as also potential increase in crude oil prices based on higher-than-expected cut in Iran oil exports following US sanctions.

In the immediate term, it may be more important to focus on containing any fiscal slippage as it may result in further higher bond yields in the economy, thereby affecting growth. Bond yields have already jumped anticipating additional borrowing along with concerns over liquidity and rates hikes.

GST revenues to date have also been below Budget estimates and the monthly run rate expected from here on looks challenging. Further excise cuts on diesel and cooking gas to mitigate impact on households and domestic inflation may put further pressure on the fiscal maths.


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The government may want to explore options to shore up its revenues in order to prepare for any exigency. It may be difficult to manage the CAD in the short term, without drastic measures such as raising import tariffs significantly on certain products.

It may be more feasible to raise revenues through accelerated divestment, higher GST on products such as gold, which will also help contain CAD, and higher import tariffs on certain products and components for consumer items, which may force companies to explore domestic production in the medium term.

Must Visit : Wealth Research
Reference : economictimes indiatimes

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