The Reserve Bank of India (RBI) maintains that markets are broadly efficient over the long term, although short-term fluctuations may occur. The central bank’s focus remains on minimising unnecessary volatility in the currency and financial markets.
India’s foreign exchange reserves are currently sufficient, and the country’s current account position is manageable. With strong economic fundamentals in place, the RBI expects healthy capital inflows to continue supporting the rupee in the foreseeable future.
The RBI does not target a specific credit growth rate. Instead, it emphasises that policy interest rates are likely to remain low, as inflation is expected to stay benign. The central bank aims to keep headline inflation around 4%, with an acceptable tolerance band of plus or minus 2%. Notably, inflation dropped to a record low of 0.25% in October, providing additional room for monetary easing.
The RBI also highlighted that a 5% depreciation of the Indian rupee typically leads to a 35 basis point increase in inflation. To maintain effective monetary policy transmission, the central bank will manage the overall quantum of liquidity in the banking system, which is currently sufficient. While there is no specific target for liquidity levels, ample liquidity will be maintained throughout the easing cycle.
Bond yields and their spreads relative to the repo rate remain in line with historical averages.
Importantly for forex traders, the RBI signalled that it will not aggressively use its reserves to intervene in the currency market to stem rupee depreciation. This stance suggests continued downward pressure on the rupee. In October, the RBI intervened near the 88.80 USD/INR level but was unable to prevent a further fall as fundamental factors weighed against the currency. Since breaking above 88.80, the rupee’s depreciation momentum has accelerated.
Today, the RBI cut the repo rate by 25 basis points as widely expected, reflecting its commitment to support growth amid very low inflation.
Forex traders should note the RBI’s dovish stance, ample liquidity, and restrained intervention policy, which may allow the rupee to weaken further in line with fundamentals.
Original Source: Giuseppe Dellamotta of investinglive.com
