PremiumUS interest rates rising steeply while the rupee slides would make dollar loan-taking risky. The real-rate cheapness of US credit offers no help here, and an adequate hedge to cover a rupee that could be set for a rougher ride won’t be cheap
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As the rupee plummets to new lows and the current account deficit widens, the Reserve Bank of India (RBI) has unveiled a raft of measures to staunch the pain. On Wednesday, it gave banks a reserve requirement holiday for specified non-resident deposits, lifted an interest-rate cap on some, eased foreign access to government bonds, doubled the limit on external commercial borrowings via the automatic route, and more.
These moves remind us of the playbook used when the 2013 taper tantrum shook the rupee. Those dollar lures, announced by then RBI governor Raghuram Rajan, worked well. RBI is again betting that opening our gates wider to inflows of money, particularly from depositors of Indian origin abroad, will aid stability. Conditions, however, aren’t exactly like they were. While RBI has bigger foreign exchange reserves that allow it to support the rupee, the global economy is headed for much worse; even stagflation seems possible. US interest rates rising steeply while the rupee slides would make dollar loan-taking risky. The real-rate cheapness of US credit offers no help here, and an adequate hedge to cover a rupee that could be set for a rougher ride won’t be cheap.