MUMBAI — The Reserve Bank of India may tighten monetary conditions further to support the rupee and manage capital outflows, but is expected to avoid the aggressive measures used during previous currency crises, according to a Reuters report published on October 16.
The rupee has weakened by around 6 per cent against the US dollar this year, amid high oil prices and continued foreign investment outflows. In response, the RBI raised policy rates in October for the first time in nearly four years and introduced measures to drain excess liquidity from the banking system, including bond sales and stricter reserve requirements for banks.
The central bank has mobilised around $150 billion since March through measures intended to strengthen its foreign-exchange position. It has also intervened in currency markets to limit pressure on the rupee.
A further interest-rate increase of up to 50 basis points in December is being discussed in market expectations, the report said. However, the RBI has not officially announced such a decision.
The rupee showed signs of recovery on October 16, helped by central-bank measures and a weaker US dollar. It rose to around 94.88 per dollar, recording a weekly gain of approximately 2 per cent, its strongest since March, according to Reuters.
The RBI faces the challenge of stabilising the currency while controlling inflation and protecting economic growth. Further monetary tightening could increase borrowing costs for households and businesses, making the central bank likely to weigh the benefits of currency support against the wider economic impact.
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