NEW DELHI: Despite the US Treasury Department tagging India on the watchlist of nations it monitors for currency manipulation, the Indian government wants the RBI to feel free to buy more hard currency, if it feels the need to, in order to sanitise forex inflows.
The RBI and finance ministry have noted in their interactions that excess global liquidity would continue to flow into India, just like it had in financial year 2008-09 after the stimulus injection measures taken by western nations in the wake of the Wall Street crisis.
“To stop that from raising inflation to alarming levels here, we will need to buy dollars. we cannot stop doing that just because the US Treasury feels it may keep our currency value slightly depressed,” said a top finance ministry official.
India has breached two of three benchmarks used by the US Treasury to measure whether a nation was manipulating currency values-it had a bilateral surplus with the US for the last quarter of more than $20 billion, likely to remain since India has historically had a trade surplus with America, and it had made net purchases of foreign currency worth 2 per cent of its GDP.
However, RBI officials said that the central bank may not “use just dollar-buying through State Bank of India” to manage the situation.
“We will also continue to mop up excess foreign capital inflows through reverse repo operations and other tools at our disposal,” said one official.
India’s foreign exchange reserves stood at $578.568 billion as of December 11, an increase of over $101 billion since March this year.
This is only expected to rise further as more flows from the $11 trillion liquidity injection initiated by the G20 countries starts moving towards emerging markets which offer higher return on investments.
Ashima Goyal, member of the Reserve Bank’s monetary policy committee, said at the MPC meeting earlier this week that unless checked, forex inflows could lead to overvaluation of the rupee which could “hurt exports, raise country risk, and lead to a sharp depreciation later.”
Both the central bank and North Bloc believe that prolonged inflows can lead to overvaluation if not sanitised with “intervention”.
Surges of foreign capital flows and then a sudden stop or outflow can be far more disastrous for the Indian rupee, they feel.