India: Government unruffled by rupee weakness – Nomura

According to India’s Finance Minister Arun Jaitley, “there are virtually no domestic reasons which are attributable” to the currency weakness, and “the reasons are global” and therefore, he believes that there is no “need for the world's fastest growing economy to come out with panic and knee-jerk reactions”, notes the research team at Nomura.

Key Quotes

“He also stated that “the currency management in these areas are done by the RBI and they are certainly doing whatever is necessary for this purpose”.”

“Fiscal commitment: Fiscal concerns have risen due to lower-than-expected goods and services tax collections, as well as lower dividend and disinvestment receipts. Given rising fuel prices, there is pressure on the government to cut the excise duty on petrol and diesel (to provide a relief to consumers), but this would further hurt fiscal finances (every INR1/litre cut in excise duty lowers revenue by INR140bn).”

“Non-resident Indian (NRI) bonds not in consideration right now: According to the Principal Economic Adviser in the Ministry of Finance, Sanjeev Sanyal, “the rupee will be allowed to find its long-term market value, but sudden volatility in either direction will be managed by the central bank using foreign exchange reserves. As far as NRI bonds are concerned, we will consider the option if necessary. But, for the moment, the level of forex reserves is adequate.”

“On interest rate defense of the currency: In response to a question on whether India should hike rates to defend the currency, Mr. Sanyal stated that India’s monetary policy committee “has been given an inflation, and not an exchange-rate target”…and the RBI will take the exchange rate into account only to the extent that it influences inflation.”

“Overall, the above statements suggest that 1) the government is committed to fiscal consolidation, which is a positive; 2) no knee-jerk measures will be announced (as they were in 2013); 3) for now, NRI bonds are not in consideration; and a mix of allowing the currency to adjust and drawing down on FX reserves will be used; and 4) rate hikes are likely only if currency weakness threatens the inflation mandate.”

“In our framework of policy options, this suggests policymakers are still in the first line of defense. Of course, the focus may soon shift to the second line of defense, if currency weakness persists, but the government is not yet ruffled by rupee weakness.”