The Indian Central bank has mentioned that a firmer currency will accommodate the imported inflation, indicating it could be used to withstand rises in the rupee as it attempts to curb price pressures in an economy headed for recession.
Following uneven inflows from overseas, the Reserve Bank of India has kept a distance from the invention in the currency market in recent days. On Monday, it described, “the recent appreciation of the rupee is working towards containing imported inflationary pressures.”
The central bank has not fully commented on the RBI’s dedication to preventing volatility hit the rupee and how it has no target for the currency.
Analysts suggest that to let the rupee strengthen will give the RBI some leeway to simplify monetary policy. Following the 2% increase, the previous week was Tuesday’s 1% rally for the Indian currency.
Chief India economist Kaushik Das(Deutsche Bank AG, Mumbai) discussed the scenario, “The RBI’s comment shows the central bank is comfortable with the current appreciation trend of the rupee and will likely tolerate more appreciation in the period ahead, from an inflation-targeting perspective.”
The previous month India’s six-member monetary policy committee decided to keep interest rates altered following a surge in the headline inflation beyond the upper limit of its 2%-6% target band.
The RBI’s absence from the currency market has also created speculations the central bank is trying to ensure easy monetary policy measures continue to support faltering growth by getting a better grip over inflation. A significant quantity of pressure in cost comes out of economic supply shocks contracted by a record 23.9% last quarter following a harsh lockdown to contain and prevent the spread of COVID-19.
“It now appears that the RBI has selected this as the more effective tool to address aspects of the current inflationary episode while ensuring that monetary policy tools continue working towards mitigating the growth risks,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. in Mumbai.