Regulatory Tweaks: Limited Support To Forex Flows But Strong INR Signaling Intent
The recent policy moves both on government and monetary regulatory front aim at managing inflation, and lingering twin deficits as well as the funding of CAD, Emkay Global has said in a report. The recent regulatory actions by the RBI pertaining to capital account come after new trade curbs aimed at addressing the looming pain on the BoP, and the external imbalances thereof.
"While today's moves to liberlise FX flows and to boost capital account are helpful, they may not have a material impact on flows. Nonetheless, they will still ease the pressure on the RBI to intervene to some extent. The measures are proactive when seen in the light of 2013, albeit less effective in incentivizing flows, but nonetheless, would be effective in preventing speculative attacks on the currency and giving directional policy signals to the markets," Emkay Global has said.
"Complementary policy efforts from both fiscal and monetary sides essentially reflect the looming pain on the BoP this year and the external imbalances thereof, apart from limitation on RBI's FX intervention. As of now, we see a sharp BoP deficit of US$61bn, and CAD/GDP of 3.2% (US$112bn), but will revisit as things evolve. That said, we see the Q1FY23 as likely to be the peak for CAD at ~3.8-3.9% and also assume mild inflows in Q4FY23 as CY22 bears the front-loaded pain,"