Policy in pocket, eye on the rupee

The rupee is tracking trade fundamentals with RBI managing a gradual decline against the dollar. In this, India is losing some of its export competitiveness against emerging economies whose currencies are falling faster. This can be an acceptable trade- off against higher imported inflation if central bank intervention in the currency market were to lessen. Interest rates will have to climb faster to neutralise second-order effects of energy price spikes. Liquidity normalisation and currency management have been guided by the growth sacrifice, leading to a light touch on interest rates and heavy support for the rupee.

Fiscal support comes in the shape of sustaining consumption demand through tax cuts, bigger subsidies and having producers shoulder some of the burden. These will have a bearing on fiscal deficit, but emerging economies were expected to take longer to reach their pre-pandemic balance. The fallout on the cost of credit has also been addressed through easier capital import controls without imposing tighter rules on its export. India Inc borrowing abroad faces a hardening market and may find it hard to roll over loans due to mature. Capital outflow in equities is fairly responsive to the external environment. Debt inflows are relatively sticky.

The big draw for debt and equity inflows will be India’s growth. If policy brings inflation to heel without losing too much momentum, capital and current accounts stand to benefit. RBI has visibility on inflation tapering and hasn’t yet found reason to revise its growth projection. If prices and income maintain their trajectory, policy could take credit for managing global crises. India recovered quickly from the pandemic. Now it must avoid a hard landing over oil prices.