RBI’s Limited Forex Market Intervention Credit Positive: Moody’s.

“Had authorities used official reserves to maintain the exchange rate at a level higher than dictated by market forces, they would have assisted importers and foreign borrowers at the expense of exporters and import-competing domestic producers,” Moody’s noted

New Delhi: Global ratings agency Moody’s on Monday said the Reserve Bank of India’s (RBI) limited intervention in the currency market to stymie rupee depreciation is ‘positive’ for the country’s credit outlook, reports PTI.

The rupee, which has slumped about 15% against the US dollar in the past three months, touched an all-time low of 52.73 against the greenback on 22nd November. The steep fall is hurting importers as well as entities who have borrowed in foreign currency.

Noting that RBI has limited its “intervention in currency markets to periods of extreme volatility”, Moody’s said such restraint is credit positive.

The decision not to spend large amount of international reserves to support a higher rupee is credit positive for two reasons, it said.

“First, intervention would have expended reserves without reversing the depreciation effectively, since global risk aversion and India’s widening current account deficit would have forced the rupee to fall further against the dollar despite the intervention,” Moody's Investors Service said in a report.

Further, it pointed out that effective globalisation requires market participants to adjust their investment, consumption and borrowing plans as per the availability of foreign capital and import costs.

India’s foreign exchange reserves stood at nearly $309 billion as on 18th November, as per official data.

“Had authorities used official reserves to maintain the exchange rate at a level higher than dictated by market forces, they would have assisted importers and foreign borrowers at the expense of exporters and import-competing domestic producers,” Moody’s noted.

Such a move would have delayed or distorted private sector adjustment to global market signals.

“We expect that currency depreciation, by making imports more expensive and exports cheaper, will ultimately force an adjustment, and help narrow the current account deficit over the next few quarters,” the report said.

On the other hand, sliding rupee also widens the country’s already high fiscal deficit, as the scenario raises the government’s petroleum products related subsidy burden.

The rupee depreciation could also result in higher inflation, which is hovering over 9%, Moody’s said.

Earlier in the day, the prime minister’s advisory panel chief C Rangarajan said movement in global commodity prices, and not the declining value of rupee against dollar, would have bigger implications for the inflation.

Source : moneylife.in