The RBI Defends 96.90 With Reserves, Not Rates

1. The RBI spends three days defending a number its governor argued against

The rupee slumped to 96.90 to the dollar on Wednesday morning, an all-time low, after running at 96.96 the week before. It has given up close to 2% this month, the worst showing of any Asian currency. The Reserve Bank leaned against it for three consecutive sessions, selling dollars hard and timing a good share of that selling for off-peak hours, when thinner books make the same amount of intervention hit harder. Bankers read the timing as the message: a central bank trying to make finite ammunition look larger than it is.

Finite is the operative word. Reserves stood near $682 billion at the end of May, roughly $46 billion below where they started the year. For an economy India's size that is not a crisis. It is still a great deal of money to spend holding a line on a screen.

The awkward part is who is holding it. Governor Sanjay Malhotra and his deputy Poonam Gupta, both brought in from outside the institution, are on record preferring that the market largely set the level and that the RBI step in mainly to curb excessive volatility. The dealing desk has spent this week doing close to the opposite.

The read: an institution is defending a round number that its own leadership has publicly argued should not be defended. Either Malhotra has quietly changed his mind about the exchange rate, or the decision is no longer entirely his. Which one it is matters more for the next six months than 96.90 does.

2. Brent at $100 does the tightening Malhotra calls premature

The Monetary Policy Committee has held the repo rate at 5.25% for two meetings running, with a neutral stance. Malhotra's framing has not moved: the inflation pressure is "largely supply-side", and it is "premature to discuss monetary tightening". As economics that is defensible. An oil shock is a relative price change, and a central bank that hikes into one is squeezing real incomes over a problem it did not create.

As arithmetic it is harder. Brent went through $100 on July 23 for the first time since late May. India's June trade deficit came in at $30.43 billion, a five-month high, 59% wider than the $19.10 billion of a year earlier and up from $28.21 billion in May. Crude and petroleum imports alone were $19.32 billion, up 23% on the year, with electronics at $13.36 billion and gold at $1.96 billion. The commerce ministry's own reading is that this is prices rather than volumes, which is precisely the point. India is paying more for the same barrels, in dollars it has to go out and buy.

So the tightening is happening. It is arriving through the import bill and the currency instead of the repo rate, and the RBI is settling the invoice out of reserves rather than out of growth.

The read: a country that imports its energy and pays for it in dollars does not get to decide whether an oil shock tightens financial conditions. It only gets to decide where the tightening lands. Delhi has chosen the balance sheet, and the honest question is how long that stays cheaper than a rate hike.

3. Foreign funds sell $27.6 billion of Indian equities and buy the bonds

Overseas investors have sold $27.6 billion of Indian shares so far this year, and at the peak the pace was remarkable: something close to $30 billion out in about three and a half months, with global funds openly using India as the funding leg while they chased AI exposure elsewhere. Since the middle of June a little of it has come back, roughly $2 billion, concentrated in financials.

The flow worth watching runs the other way. The same foreign investors have been buying Indian government bonds while they sold the equities. That is not a loss of faith in India. It is a far more specific verdict: they will lend to the sovereign at these yields, and they will not own the earnings.

It is a coherent verdict, and it is a problem for the equity story rather than the credit story. Rupee depreciation comes straight off dollar returns on Indian stocks, and corporate earnings growth has been too soft to offset it. For two years India was the long that everyone agreed on. This year it has been the cash machine that funded the trades everyone preferred.

The read: buying the bonds while selling the shares is not indecision, it is a judgement that India's credit is worth more than India's growth. Two years ago nobody in Mumbai would have accepted that framing for a second. So what actually changed, the country or the price?

The week ahead

• The rupee against 97: the RBI has spent three sessions and an unknown quantity of reserves keeping the figure in front of the decimal point. Whether it defends the next round number, or quietly stops, is the clearest signal available about who is setting policy.
• July trade data, due mid-August: June's $30.43 billion deficit only partly contained the move above $100. July is the first full month that carries it, and it will settle whether the import bill is stabilising or compounding.
• The next MPC meeting: the language to watch is not the rate, which is very likely unchanged, but whether "supply-side" survives another month of the currency doing the tightening instead.