India’s central bank said a stronger currency would help contain imported inflation, signaling it could tolerate rupee gains as it tries to curb price pressures in an economy heading towards recession.
The Reserve Bank of India, which refrained from intervening in the currency market in recent days amid irregular inflows from abroad, took a step forward on Monday by explaining its point of view: “The recent appreciation of the rupee aims to contain imported inflationary pressures. . “
He departs from the generally reluctant central bank, whose comments on the currency are limited to how the RBI has pledged not to let volatility hit the rupee and how it has no goal for the currency.
Apparent comfort from the RBI fueled Tuesday’s 1% rally for the Indian currency, after advancing 2% last week. Analysts said allowing the rupee to strengthen will give the RBI some leeway to keep monetary policy easy.
“RBI commentary shows the central bank is comfortable with the current rupee appreciation trend and will likely tolerate further appreciation in the coming period, from an inflation target perspective. “said Kaushik Das, chief economist for India at Deutsche Bank AG in Mumbai. .
India’s six-member Monetary Policy Committee decided last month to keep interest rates unchanged after headline inflation rose above the upper limit of its 2% to 6% target range. The minutes of that meeting showed that Michael Patra, vice-governor and influential member of the panel, was in favor of reducing easy monetary conditions if inflation did not return to the desired range.
A working paper written by Patra over two years ago showed that a 1% change in the exchange rate translates into a 15 basis point change in headline inflation. The impact of currency fluctuations is passed on to headline inflation over a five-month period, according to the newspaper.
The absence of the RBI from the currency market has also fueled speculation that the central bank is trying to ensure that easy monetary policy measures continue to support failing growth by better controlling inflation. Much of the pressure on prices is due to supply shocks in an economy that contracted by a record 23.9% in the last quarter following a severe lockdown to stem the spread of the coronavirus .
“It now appears that the RBI has chosen it as the most effective tool to deal with some aspect of the current inflationary episode, while ensuring that monetary policy tools continue to work to mitigate growth risks,” he said. said Suyash Choudhary, Head of Fixed Income at IDFC Asset. Management Co. in Mumbai.
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