The aftermath of the biggest crash in the Indian rupee in history is becoming clear: business are scrambling to refine budgets, import and export activity is disappearing as there is zero clarity what the actual transaction prices net of FX are, purchases of hard assets are exploding as people are desperate to protect what little purchasing power they have left, capital controls are being instituted virtually everywhere, and the overall economy – at least that part that is reliant on foreign trade flows – is grinding to a halt. In fact, it got so bad, that moments ago the 1 month USDINR forward hit a ridiculous 70.
However, what is scariest is that so far the Indian Central Bank, the (RBI) Reserve Bank of India has failed to reassure markets that it has anything up its sleeve. At least until moments ago, when the RBI finally announced its first band aid solution in the form of this: “RBI introduces Forex Swap Window for Public Sector Oil Marketing Companies”
On the basis of assessment of current market conditions, Reserve Bank of India has decided to open a forex swap window to meet the entire daily dollar requirements of three public sector oil marketing companies (Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp). Under the swap facility, Reserve Bank will undertake sell/buy USD-INR forex swaps for fixed tenor with the oil marketing companies through a designated bank. The swap facility gets operationalized with immediate effect and will remain in place until further notice.
Translation: instead of doing a shotgun liquidity injection targeting everyone (ala Fed, ECB, BOE and BOJ), and be sure the USD shortage is everywhere not just at these three oil companies – the RBI will instead proceed with surgical USD liquidity injections based on its perceived importance of the dollar recipients. In this case, the companies most exposed to the vagaries of the petrodollar system, because last we checked a barrel of Brent can be bought only for USD, not for INR.
However, what is more troubling is that while the RBI may have just bailed out its critical oil industry, if only for a few days or weeks, it means everyone else is left hung out to dry and the exodus of all INR positions into USD will only accelerate to a point where the USDINR may surge well over 70 when it reopens for trading, leading to an ever deteriorating currency collapse toxic loop (and one which most likely will inevitably result with the RBI leasing out its several hundreds tons of gold to those in greater need for physical).
Which also means that the only winners are those who bought gold, or rather smuggled it thanks to numerous capital controls, as only their purchasing power has been preserved: gold in rupee terms is at an all time high.
For everyone else: please keep reading Krugman.
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