Rupee turning out to be the most stable currency, says RBI report

"Inflation slowing down personal consumption expenditure"

The Indian rupee is turning out to be the most stable currency, at least among emerging market currencies with implied volatility at its lowest level since 2008, the state of the economy report of the Reserve Bank of India said.

Implied volatility is the metric that captures the market’s view of the likelihood of fluctuations in its value.

“The INR has emerged as one of the least volatile among major currencies, with the least one-month implied volatility in 2023 so far,” the report which is authored by RBI staffer, including deputy governor M.D. Patra said. The views expressed in the report article are those of the authors and do not represent the views of RBI.

After declining 7.8% against the dollar in FY23 – mainly due to the war in Europe and monetary policy tightening by global central banks, the Indian unit has stabilised this financial year, as the currency has moved in a narrow band while strengthening by 0.2%. In 2023, the Indian unit gained 0.95% against the dollar.

The rupee appreciated by 1.2 per cent (m-o-m) in terms of the 40-currency real effective exchange rate (REER) in May 2023, the report noted.

The rupee depreciated by 0.4 per cent (m-o-m) to the US dollar in May 2023, in line with most EME currencies.

“During the calendar year 2023 [till June9], India’s foreign exchange reserves increased by $ 31.0 billion, which is the second highest among major foreign exchange reserves holding countries,” the report said.

Commenting on the RBI’s hawkish pause in June review of the monetary policy, the report said keeping the policy rate unchanged, monetary policy has been effectively tightened in the near-term in terms of the real policy rate while maintaining a positive real rate four quarters ahead over which monetary policy is expected to work, given its lags.

“Recent national accounts data and corporate results when read in conjunction clearly show that inflation is slowing down personal consumption expenditure,” the report pointed out.

“This, in turn, is moderating corporate sales and holding back private investment in capacity creation. Bringing down inflation and stabilising inflation expectations will revive consumer spending, boost corporate revenues and profitability, which is the best incentive for private capex,” it said.

Commenting on the credit market, the report said the wedge between growth rates of bank credit and deposits has started to narrow, suggesting that credit growth is rebasing to more durable sources of funding.

The growth in deposit mobilisation recorded a 27-month high of 11.8 per cent amidst continuing efforts by SCBs to bridge the funding gap, it said.

Even if the central bank has not ruled out further interest rate hikes, bank lending and deposit rates have started to soften.

According to the report, on a month on month basis, the weighted average lending rate (WALR) on fresh rupee loans and weighted average domestic term deposit rates on fresh deposits declined by 23 bps and 12 bps, respectively, in April 2023.

The asset quality of banks seems to have improved further with loan loss provisioning for banks continued to fall for the fifth consecutive quarter in January-March in an environment of sustained collection efficiency and improving asset quality.

On FDI flows, gross inward foreign direct investment (FDI) flows, moderated to $ 6.9 billion in April 2023, from US$ 8.4 billion in April 2022. Net FDI declined to $ 2.8 billion in April 2023 from $ 5.3 billion a year ago.