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Ease liquidity; let rupee find its own level, economists tell RBI Governor

Central bank holds consultations on macroprudential measures

Reserve Bank of India Governor Sanjay Malhotra (Reuters)

Let the rupee find its own level — that was the broad message conveyed by senior economists to the Reserve Bank of India (RBI) Governor Sanjay Malhotra in a meeting in Mumbai on Friday. Economists are learnt to have communicated to the central bank chief that the RBI’s current stance on rupee is the appropriate way to deal with the ongoing situation in the currency market and that RBI should allow rupee to adjust rather than hold it in one place, two people aware of the discussion said.

The key debate over whether the RBI’s monetary policy actions should focus on the quantity of money or price of money featured in the meeting. “The discussions featured mainly around liquidity, interest rates, rupee and macroprudential measures of the RBI. Many participants raised the need to ease liquidity to the RBI Governor but there was no broad consensus on the method to be adopted to achieve the goal. There were many suggestions ranging from a tweak in CRR (cash reserve ratio), to buying/selling swaps or conducting Long-Term Repo Operations (LTROs),” a person aware of the discussions told The Indian Express.

Also Read | How the falling rupee could increase financial burden on companies that went for overseas borrowing

While easing liquidity was cited as one of the most important requirements by the economists to the RBI, many also argued for a rate cut citing growth slowdown. However, it was a divided house between the economists in the meeting, with those representing banks suggesting measures to ease liquidity over a rate cut, one of the persons cited above said.

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“Some suggestions by economists favoured easing liquidity over a rate cut with the view that there might be some relief on the fiscal policy front. However, others differed by saying that there may not be much fiscal space for substantive actions, so monetary policy will have to take charge,” the person said.

The discussion with the economists in India’s financial capital came after a similar meeting with economists held by the RBI Governor in Delhi earlier this week. The RBI Governor is slated to meet chiefs of public sector and private banks early next week.

Also Read | In calibrated move, RBI loosens grip, lets rupee depreciate against US dollar

These interactions are the first set of meetings with bankers and economists after Malhotra took charge as the RBI Governor in December and come ahead of the monetary policy review scheduled for February 5-7.

The meetings are crucial as they come in the backdrop of concerns over a growth slowdown and fluctuations in the Indian currency. India’s GDP growth is seen slowing to a four-year low of 6.4 per cent in the current financial year 2024-25. While some economists have stated that the RBI will exert caution in its next monetary policy meeting, others are expecting a rate cut. The RBI has kept its key policy rate unchanged at 6.5 per cent since February 2023.

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A stronger dollar, rise in crude oil prices and selling by foreign investors in the equity market are the major reasons for depreciation in the rupee. Since November 1, 2024, the rupee has depreciated by over 2.6 per cent. However, the rupee’s fall in the last few weeks has led to the conclusion in the market that the RBI tried something and they probably had anticipated that holding it beyond a point makes no sense.

Aanchal Magazine

Aanchal Magazine is Senior Assistant Editor with The Indian Express and reports on the macro economy and fiscal policy, with a special focus on economic science, labour trends, taxation and revenue metrics. With over 13 years of newsroom experience, she has also reported in detail on macroeconomic data such as trends and policy actions related to inflation, GDP growth and fiscal arithmetic. Interested in the history of her homeland, Kashmir, she likes to read about its culture and tradition in her spare time, along with trying to map the journeys of displacement from there. ... Read More