The rupee rebounded on Wednesday, on news that the government may announce measures to support the currency after a planned review of the economy by the Prime Minister this weekend. What measures can the government and the Reserve Bank of India (RBI) take?
We have a handy precedent in the methods adopted and the instruments used during the taper tantrum in 2013.
It pays to look into the past to know what may work and what won’t.
Back in 2013, the central bank had announced a series of measures that sought to stabilize the Indian currency by changing the dynamics of domestic liquidity. The accompanying chart shows the impact of each measure on the rupee. The hike in the effective policy rate, which was the marginal standing facility rate at that time, the cap on the amount banks can park at daily liquidity windows and others had, at best, a fleeting impact on the exchange rate.
What worked in 2013 was the special window, through which oil marketing companies could meet their dollar requirements. Of course, the game changer was the special swap for FCNR (foreign currency non-resident) deposits, which allowed banks to raise dollar deposits and swap the same with RBI at a subsidized rate.
It is important to examine these when talks of the government tapping non-resident Indians through NRI bonds has surfaced. Analysts believe that this would have a salutary effect on the rupee. Sceptics say, however, that it may not have a lasting impact. “I think we have sort of missed the opportunity to stabilize the rupee,” said Abheek Barua, chief economist at HDFC Bank Ltd, adding that the market needs to see a decisive statement from RBI for sentiment to change.