 "Siddhartha Sanyal")
The Indian rupee seems to have stabilised in recent weeks after the heavy depreciation during June-August. Accordingly, the debate - whether the Reserve Bank of India (RBI) should roll back its July liquidity tightening measures as early as on 20 September - has of late turned stronger. I feel while RBI would likely prepare itself to start rolling back some of its July measures fairly soon, this Friday's meeting might not be the best time to do so.
Indeed, the July measures, as expected, turned out to be futile, if not counter-productive, for arresting the fall in the rupee. On the other hand, it exerted stress on near-term interest rates, corporates' debt repayment capability and potentially on growth. It is important that RBI soon start unwinding such measures. Till a few days ago, the runaway depreciation of the currency and the precariously negative market sentiment did not offer the central bank the opportunity to do so. Since early-September, RBI aptly started emphasising more on near-term capital inflows rather than considering a de facto "interest rate defence" for the currency. The recent relaxations related to the Foreign Currency (Non-Resident) deposits had been a key initiative in this regard, with the potential of generating about $10 billion in three months - this is being proven as a meaningful support for the currency and sentiment. Moreover, the current account deficit, which was one of the key problems in recent years, is set to surprise favourably in 2013-14 (potentially to about $57 billion from $88 billion last year). As a result, with a few more appropriate policy initiatives, the rupee will likely stay supported, if not strengthening a bit more, in the coming months.
Nevertheless, while the Indian currency has seen a steep "price correction" in September, RBI will likely prefer to wait for some more stability or "time correction" in the rupee trajectory before it starts rolling back its July measures. The wait can be as less as just a few weeks. Importantly, the start of the rollback need not wait for another monetary policy date and can take place any day at a more appropriate time. The central bank's guidance for future policy would also be quite important - we expect a balanced view with considerations for supporting growth over the medium term once the currency gains more stability.
The author is chief India economist, Barclays. Views expressed are personal
