RBI considers interest rate hike to stabilize rupee
What's the story
The Reserve Bank of India (RBI) is weighing all possible measures to stabilize the Indian rupee, including an interest rate hike and currency swaps. The move comes after the rupee hit a new low of nearly ₹97 against the US dollar this week. Top officials at RBI, including Governor Sanjay Malhotra, have held several internal meetings on this issue.
Strategy options
Interest rate hike, sovereign dollar bond sale under consideration
Among the strategies being considered by the RBI is an interest rate hike. The next scheduled monetary policy decision is on June 5, but the central bank has previously made out-of-cycle adjustments, like in May 2022. Other measures include raising dollars from overseas through a deposit scheme for non-resident Indians (NRIs) and selling a sovereign dollar bond, which would be decided by the government.
Historical parallels
Measures similar to those taken during 2013
The measures under consideration by the RBI are similar to those taken during the 2013 "taper tantrum" period. There was market panic sparked by fears of the US Federal Reserve reducing its bond purchases. Back then, India had offered a deposit scheme for non-residents through local banks to boost foreign currency inflows. The central bank estimates these deposit schemes could attract as much as $50 billion this time around, compared to about $30 billion previously.
Acknowledgment
Policymakers acknowledge faster rupee depreciation
Policymakers have acknowledged that the rupee is depreciating faster than expected. They believe India's economic fundamentals are strong and the banking system is stable, but this strength isn't reflected in the exchange rate. The central bank's top priority now is to stop further depreciation of the currency at any cost. Raising borrowing costs could attract foreign bond inflows by widening interest rate differentials between India and US.
Upcoming meeting
RBI's monetary policy committee to meet from June 3-5
The RBI's six-member monetary policy committee will meet from June 3-5. The committee has kept its benchmark rate unchanged at 5.25% this year, but most economists expect a hike in the coming months as inflation picks up. On Wednesday, the RBI announced a $5 billion swap auction to inject liquidity into the banking system and bolster its dollar reserves in the short term.