Financial Markets and the Economy - Intersections

(The following article appeared in moneycontrol.com on 21Jun2022: https://www.moneycontrol.com/news/opinion/rbi-can-afford-to-let-rupee-depreciate-a-bit-8714721.html ) RBI’s Exchange Rate Choices For long now, RBI has used a banal statement to describe its foreign exchange management policy – ‘we do not target any specific level for the Rupee; we only intervene to control excessive volatility’.   Reality, however, is complicated. RBI often finds that it must make involved choices, and sometimes intervene in exchange markets to an extent that it practically sets market prices.    As an example, take the pandemic impacted fiscal year 2020-21 (FY21). India saw a flood of foreign currency inflows in that year. With domestic consumption and imports contracting sharply, India’s current account balance (the sum of India’s net goods and services trade and remittances) swung from a deficit of USD 25 bn in FY20 to a surplus of USD 24 bn in FY21. Add USD 44 bn of net Foreign Direct Investments (F

 (A version of this article appeared in Moneycontrol.com on 09June2022 per link below https://www.moneycontrol.com/news/opinion/can-rbi-quell-indias-inflation-8661921.html ) Can RBI Quell India’s Inflation?   The Monetary Policy Committee (MPC) today raised their estimate of India’s fiscal year 2022-23 (FY23) Consumer Price Index (CPI) inflation to 6.7%, a full 1.0% higher than their previous estimate two months ago. Given the trends in energy and commodity prices in the wake of the Russia-Ukraine conflict, continued strains in global supply chains, and the incomplete pass through of much of these increased costs, our actual FY23 inflation could well cross 7.0%.    Since 2016, when India formally enshrined inflation targeting into the RBI Act, the MPC is mandated with keeping inflation within a range of a target CPI inflation (currently set at 4%, +/- 2%) by changing the policy repo rate appropriately. Even as most economists welcomed this development, from an MPC perspective, controll