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The Indian rupee's recent decline to a record low against the US dollar has sparked a debate among economists regarding the appropriate response from the Reserve Bank of India (RBI). Anubhuti Sahay, Head of India Economic Research at Standard Chartered Bank, anticipates further weakening of the rupee, predicting a rate of 87.75 per dollar by the end of 2025. This forecast underscores the gravity of the situation and highlights the urgent need for effective policy interventions. Sahay's projection is not an isolated opinion; it aligns with the concerns expressed by Arup Rakshit, Group Head of Treasury at HDFC Bank, who emphasizes the detrimental impact of a falling rupee on economic growth. Rakshit's perspective strongly suggests that the RBI's actions should extend beyond mere interest rate adjustments.
The core of the disagreement lies in the approach to addressing the current economic challenges. While interest rate cuts might seem like a conventional monetary policy tool, both Sahay and Rakshit advocate for prioritizing the improvement of rupee liquidity. They argue that a simple repo rate cut would be ineffective in the absence of sufficient liquidity within the banking system. The current liquidity deficit is significant, estimated to be in the range of 1-2.5 lakh crore by the end of March 2025. Consequently, they propose alternative measures like a cash reserve ratio (CRR) cut of 50 basis points, along with the implementation of buy-sell swaps or long-term repo operations (LTRO) to alleviate the liquidity crunch. This comprehensive approach underscores the need for a multi-pronged strategy rather than relying on a singular solution.
The urgency to address the liquidity issue stems from its potential repercussions on economic growth. The first half of the year witnessed a growth rate of 6.4%, with expectations for a higher 6.7% in the second half. However, the current liquidity constraints threaten to impede this anticipated growth trajectory. The government's adoption of a just-in-time technology for releasing balances also contributes to the problem, further complicating the already challenging liquidity situation. Thus, the lack of sufficient liquidity presents a significant barrier to achieving the desired economic growth targets. The economists' consensus points to the need for a more proactive and comprehensive approach by the RBI.
Looking ahead, the economists' forecasts regarding interest rate cuts differ in their timing but align in the need for rate adjustments. While a February cut is deemed unlikely, a potential 50 basis points cut between April and June is considered feasible, depending on the trajectory of the US economy and the actions of the US Federal Reserve. A larger 75 basis point cut is anticipated for the following fiscal year. The uncertainty surrounding US economic data, potential Fed rate hikes, and tariff barriers represents significant challenges that could influence the RBI's monetary policy decisions. Balancing the need for economic stimulus with concerns about inflation and global economic conditions is a complex undertaking that will necessitate careful consideration of the various factors at play.
In conclusion, the current situation requires a well-coordinated approach involving both the RBI and the government. The focus on improving rupee liquidity is crucial, as it directly impacts the country’s economic growth prospects. The timing of potential interest rate cuts remains contingent on global economic conditions and the actions of the US Federal Reserve. The challenge for the RBI lies in successfully navigating the complex interplay between domestic economic needs and global economic uncertainties. This requires a dynamic and adaptable monetary policy strategy that can respond effectively to evolving economic circumstances and maintain stability within the Indian financial system. The coming months will be critical in determining the success of the implemented measures and their impact on the Indian economy.
Source: Standard Chartered economist sees rupee at 87.75 per dollar by end-2025