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How Jupiter's Vazirani is playing the Indian rupee slide
by Avinash Vazirani on Aug 23, 2013 at 12:51
Tracking the latest slump in the Indian rupee against the world’s major currencies, we have been struck by how reluctant the Reserve Bank of India (RBI) has been to intervene directly in the markets to support the currency.
There was a time when the RBI was much less shy about coming forward. At the height of the financial crisis, in 2008, the central bank had no qualms selling billions of dollars a day to support the rupee and send a message to the markets that there was a level below which it would not accept further depreciation. So what’s changed?
The RBI, in our view, is the victim of unfortunate timing.
The outgoing governor of the central bank is in the process of handing over the reins to his successor, Raghuram Rajan. Rajan does not officially take up his post until 5 September, leaving something of a power vacuum at the top of the RBI.
In such an “interregnum”, it is quite easy to imagine policy paralysis, with a soon-to-be ex-governor unwilling to sanction, for instance, a major intervention in the foreign exchange markets, and a new governor not yet in a position to be able to do so.
Once Rajan is in place, we believe the RBI will act more decisively to stabilise the rupee.
Concern, meanwhile that the RBI may not have the financial muscle to intervene appears in our view to be unfounded given the latest data showing a rise in the central bank’s forex reserves.
The minutes of the latest RBI advisory committee meeting meanwhile provide another clue, in our view, as to why the RBI has been less active in the foreign exchange markets than in the past. The minutes show some members of the committee were keen to let the rupee continue its downward slide as it would improve the competitiveness of India’s exporters.
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