Opinion National Interest PoV 50-Word Edit

ThePrint On Camera Videos In Pictures

Society & Culture Around Town Book Excerpts Vigyapanti The Dating Story

More Judiciary Education YourTurn Work With Us Campus Voice

Opinion National Interest PoV 50-Word Edit

ThePrint On Camera Videos In Pictures

Society & Culture Around Town Book Excerpts Vigyapanti The Dating Story

More Judiciary Education YourTurn Work With Us Campus Voice

Rupee’s fall to 100 will be a harsh check on India’s ambitions

A central bank can either defend the exchange rate or control interest rates. It cannot do both. For too long, the RBI tried to skirt this reality.

Long before the first missiles were fired in the Middle East, the warning signs of a 2013-style capital exodus were visible in the gap between India’s ambitions and economic resources. Once the Iran war revived the dollar’s safe-haven appeal, the bottom gave way under the rupee.

Asia’s worst-performing currency over the past year weakened through a key psychological barrier of 95 against the greenback to hit a record intraday low of 95.12 on Monday. The conflict in the Persian Gulf is the trigger for the unusual weakness, but the fragility is domestic.

Traders rightly sensed Reserve Bank of India’s mandate to cap local banks’ end-of-day currency positions at $100 million as a desperate measure. Announced late last Friday, the restriction was widely expected to knock off one-way bets against the rupee. But it backfired. The market is no longer confident that the RBI will be able to stop the rupee from slipping past 100. After all, when a monetary authority restricts how lenders manage their books, it unwittingly ends up signaling that traditional tools like interest-rate hikes or dollar sales are no longer sufficient. That’s when speculators swoop in.

In a globally integrated financial system, a central bank faces a choice: It can........

© ThePrint