The Reserve Bank has been very prudent in managing exchange rate and the recent decline witnessed in the rupee is not a reflection of a change in the fundamentals of the country’s economy, HDFC Ltd Chairman Deepak Parekh said on Tuesday.
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The country has adequate foreign exchange reserves to cover its imports for 9 months and the present depletion in the reserves does not warrant a warning alarm, he said.
Parekh said the International Monetary Fund (IMF) is right in its guidance that in the present situation, countries need to use their forex reserves more prudently to guard against possible future shocks and intervene only to ensure macro-economic stability.
This means allowing exchange rates to adjust, whilst using monetary and fiscal tools to align the inflation rate nearer the target rate.
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“To my mind, the RBI has been extremely prudent in its exchange rate management. We have never seen a free fall of the rupee and the present currency depreciation is not a reflection of a change in the fundamentals of the Indian economy,” the veteran banker said while speaking at an event organised by Indian Chamber of Commerce.
Last month, Finance Minister Nirmala Sitharaman also defended the slide in the currency saying the rupee has not weakened but it is the dollar which has strengthened.
The domestic currency has depreciated by around 11 per cent so far in 2022. It crossed the 83-mark for the first time on October 19.
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Parekh said the dollar continues to remain a safe haven asset. The impact of the dollar strength has been harsher for emerging markets as it triggers the risks of taper tantrums and sudden large outflows of capital can have a destabilising effect on trade and finance.
He said the forex reserves of many countries have shrunk, partly with central banks defending their currencies and largely due to valuations changes. In the case of India, the forex reserves, which peaked at $642 billion in October last year, is now at $528 billion.
“Our import cover currently stands at 9 months compared to 15 months earlier. In 2013, at the time of the taper tantrum, India had an import cover of 6.5 months. In 1991, India had forex reserves just for 15 days. Fortunately, the present situation does not warrant a warning alarm,” Parekh noted.
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He said as inflation continues to remain outside the comfort zone of 2-6 per cent, the RBI has little choice but to increase interest rates.
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Parekh, however, is confident that the central bank will not follow the steps of the US Federal Reserve and raise rates by 75 basis points.
“They (RBI) will do cautionary increases and will not de-stabilise the economy. They will be much more prudent in balancing the growth vs interest rate hikes,” he said.
The Federal Open Market Committee (FOMC) meeting is underway and the outcome will be announced on Wednesday.
Parekh said despite global slowdown, there is a consensus that India will remain amongst the fastest growing major economies in the world.
“Yes, GDP growth for FY22 may be lower than 7 per cent, but that is no reason for disappointment. What is important to note is the inherent resilience that is now embedded in the Indian economy,” Parekh added.