India Wants a V-Shaped Recovery at Any Cost
Traders who see rupee appreciation as a surefire bet need to realize that the country's liquidity glut is a political choice
India’s financial system is swimming in rupees.
Photographer: Dhiraj Singh/Bloomberg
A collapse in imports during the coronavirus lockdown has left India awash with dollars. Now a further influx of greenbacks is expected as an embryonic economic recovery draws investors back. To banks, this means one thing: The local currency is a sitting duck for appreciation against a weakening dollar.
Policy makers won’t want a stronger rupee to become a one-way bet, but the market doesn’t believe them to have many other options. What the authorities have done so far — scoop up the dollars by giving banks rupees — has left the financial system swimming in money and threatens to fuel inflation that’s already above the central bank’s target. It’s a mirror image of China, where a spate of corporate defaults has squeezed interbank liquidity.