INSUBCONTINENT EXCLUSIVE:
A collapse in imports during the coronavirus lockdown has left India awash with dollars
Now a further influx of greenbacks is expected as an embryonic economic recovery draws investors back
To banks, this means one thing: The local currency is a sitting duck for appreciation against a weakening dollar.Policy makers won't want a
stronger rupee to become a one-way bet, but the market doesn't believe them to have many other options
threatens to fuel inflation that's already above the central bank's target
It's a mirror image of China, where a spate of corporate defaults has squeezed interbank liquidity.While China's recovery from the
pandemic has made it the first major economy to consider exiting emergency economic measures, in India, monetary stimulus is still very much
If the Reserve Bank doubles down on its generosity in 2021, the country's red-hot equity markets could get dangerously overvalued
anti-growth at such a critical juncture
excuse to prematurely hit the brakes.The authorities are in a bind
They have flooded banks with rupees in exchange for surplus dollars, hoping easy liquidity will not only stem the deterioration in corporate
solvency but also restore missing animal spirits in the broader economy.Thanks to $58 billion of RBI dollar purchases in the first nine
months, the rupee is the worst-performing Asian currency this year
While inflation last month was a slower-than-expected 6.9 per cent, it has exceeded the central bank's 2 per cent to 6 per cent range for
A stronger rupee might help the central bank tame inflation; a liquidity glut will make it worse.Or at least that's the reasoning behind
the near-consensus bet on the Indian currency
Traders are putting their money on the rupee being Asia's best performer in 2021
In the meantime, foreign money will keep coming, into a $65 billion pipeline of mergers and acquisitions and government privatization deals,
That extends a 2.5-percentage-point reduction since February 2019, with 1.15 points coming after the pandemic hit
The Reserve Bank had to do this heavy lifting because the government didn't want its rickety finances to take too much of the strain
Bolder fiscal easing was possible only with the monetary authority directly buying the government's bonds, something the RBI was hesitant
to do lest monetization of deficits become a habit with politicians.Hence, the central bank opened the liquidity spigots instead by buying
economist Jahangir Aziz.What will the RBI do in 2021? If demand revives, it can slowly turn off the taps
Corporate earnings, once they're rising because of sales growth rather than layoffs and wage reductions, can attract investors even without
the prop of artificially cheap money
Chances are politicians won't want the central bank chief to remove the punch bowl in a hurry.Governor Shaktikanta Das's strategy may be
to mop up some of the excess liquidity created by dollar purchases by issuing special bonds to banks
That would have a cost, but overall this approach would keep the rupee competitive for Indian exporters and prevent an inflation spiral
perhaps kept interest rates too high for too long
They also kept liquidity tight
Growth began to slow sharply long before Covid
Hence, there's pressure on the governor to accept a more flexible inflation target: Politicians will want their V-shaped recovery at any
How Mr Das manages their demands against threats to financial stability from cheap money may be a more important story for India investors
in 2021 than the standard growth versus inflation trade-off.(Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies
He previously was a columnist for Reuters Breakingviews
He has also worked for the Straits Times, ET NOW and Bloomberg News.)Disclaimer: The opinions expressed within this article are the personal
The facts and opinions appearing in the article do not reflect the views of TheIndianSubcontinent and TheIndianSubcontinent does not assume
any responsibility or liability for the same.
