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The Reserve Bank of India (RBI) is facing a tricky trilemma: FX management to ensure a competitive rupee, withdrawing excess systemic liquidity and keeping bond yields in check. Economists at ANZ Bank discuss certain tools that can be utilised by the RBI to manage the trilemma. Among them is allowing greater tolerance for rupee strength. The USD/INR pair is now forecast to end 2021 at 71.00, closer to pre-COVID levels. 

Key quotes

“Swifter growth (GDP in Q3 FY21 witnessed a mild expansion) and stubborn inflation will prompt the RBI to normalise monetary policy, which it has already begun in parts.” 

“In order to assuage markets, we believe the reliance on various tools to drain liquidity will become more important, like raising the reverse repo rate and the SLR. The rupee’s appreciation can be another channel and we think the RBI will ease its intervention as a result.” 

“We expect USD/INR to end 2021 at 71.00, closer to its pre-COVID levels. We still believe a sharp appreciation is unlikely, given policymakers’ tilt towards self-reliance and a competitive rupee. USD/INR at 70.00 should be the line in the sand.” 

 

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