India's current Central Bank problem is a bit like the challenge Indian kids face. Indian parents want you to be all three things at once - super smart, good-looking, and socially savvy, ready to jump up and make conversation when neighbour aunty drops in.
This trinity of skills is of course, near-impossible to achieve (although said parents will always claim that some distant cousin possesses all three).
Central banks face a similar problem. They have three goals —keep the currency stable, allow free flow of money across borders, and set interest rates to suit the country’s needs. But they can’t achieve all three at once. Economists call this the ‘impossible trinity.’
India's RBI has historically focused on free money flows and controlling interest rates, while not trying to stabilize the rupee. But in recent years under Shaktikanta Das, it changed course, and worked hard to keep the rupee’s value stable.
To do this, the central bank sold dollars and bought rupees, which reduced rupee availabilty and artificially boosted its value. As a result, money flow tightened, even as GDP growth slowed.
Now, it looks like the RBI is shifting focus back to rupee liquidity, instead of controlling the currency's value. It announced this week that it will inject Rs. 600 billion ($18 billion) into the economy to address the worst cash crunch in a decade.
Like Indian kids, the RBI must make some hard choices. And it has apparently decided to stop trying to control the value of the rupee, and let it depreciate.
In this week's Analyticks:
- A tightrope walk for RBI: Under the new RBI governor, the Central Bank is making different choices
- Screener: Stocks where foreign investors and mutual funds have increased their stake
A strong dollar is a challenge for emerging markets
The US economy post-Covid has been stronger than other developed markets, with solid economic growth and low unemployment.But its interest rates have stayed high due to inflation.
High rates have drawn global investors, who are piling money into US assets. The dollar as a result has strengthened steadily in the last few years.
A strong dollar has been tough on emerging markets
Over the past year, emerging market (EM) currencies took a huge hit. The Egyptian Pound lost more than half its value over the last year. Latin American countries such as Mexico, Argentina, and Brazil saw their currencies depreciate 18-30%, while Polish, Thai and Vietnamese currencies depreciated the least (<2%). Following Trump's victory, EM currencies fell by an average of 2-4%.
When currencies depreciate, imports such as fuel, get expensive, straining budgets. As these countries slip into the red, foreign investors lose confidence and start selling their investments. This further weakens these currencies.
The RBI kept battling a strong dollar
Former Chief Economic Advisor Arvind Subramanian, Josh Felman, and Abhishek Anand say that the RBI changed how it managed the rupee in the last two years. The data for the Real Effective Exchange Rate (REER) Index, a measure of the rupee’s intrinsic value, showed that before 2022, the rupee moved a lot due to events like the global financial crisis (2008), the taper tantrum (2013), and crises in Turkey and the IL&FS default (2018).
But since 2022, the rupee became very stable. They compare this stability to the flat cricket pitch at the Melbourne Cricket Ground. This suggests that the RBI has kept the rupee steady, almost pegging it to the US dollar.
In 2025, 2013 still haunts policymakers
Whenever EM currencies take a hit, the scars of the 2013 ‘Taper Tantrum’ resurface for policymakers.
After the 2008 global financial crisis, the US Fed started buying government and corporate bonds through a program called quantitative easing (QE). The objective was simple: By buying bonds, money would flow into the system and lower interest rates.
In May 2013, then-Fed Chairman Ben Bernanke announced that the Fed might reduce its bond purchases sooner than expected due to improving economic conditions. This meant that the dollar would likely strengthen, and US interest rates would rise.
The dollar didn't surge, but EM currencies depreciated sharply. Countries like Brazil, India, Indonesia, South Africa, and Turkey, known at the time as the ‘Fragile Five’, saw their currencies drop by over 10% in just four months. The Fragile Five had high current account deficits (spending more on imports than they earned from exports) and heavy reliance on foreign investments.
The Indian rupee was hit the hardest, depreciating by 22%, worsening the current account deficit, pushing inflation to double digits, and slowing economic growth.
But EMs, including India, took this as a wake-up call. Today, they are better prepared, as highlighted by Nomura.
Emerging Markets rise to the dollar challenge
The past few months have been challenging for many EM central banks, but they've acted quickly. Indonesia and Malaysia for example, asked commodity and state firms to bring overseas earnings back into their countries to boost their currencies. South Korea sold won debt for the first time in 21 years to defend its currency and increase forex reserves. China limited yuan lending in Hong Kong to support its value. Brazil's central bank intervened by selling $21.57 billion in the spot market in December, along with currency swaps and spot auctions. It's hard to say for sure, but there's hope that these measures could help steady these economies.
And what is the RBI doing?
Back home, RBI sold a record $81 billion from its reserves since October 2024 as it worked to keep the value of the Indian rupee up. India’s forex reserves stood at $705 billion on September 27, but is now down to $624 billion.
Since December, the RBI started course-correcting. To address the rising cash crunch in the economy, it cut the cash reserve ratio (CRR) by 50 basis points to allow banks to lend more, and has conducted variable rate repo (VRR) auctions so that banks can borrow more funds from the RBI.
These measures will pour more money into the system. And when there’s more cash in the system, banks are more willing to offer loans at lower rates. Analysts also believe that this liquidity push means that RBI is getting ready to cut the interest rate.
2025 is a different story from 2013
Now that RBI has stopped defending the rupee, the market will likely decide the rupee's value. The rupee could fall as far as 90-95 against the dollar, according to analysts.
While a falling rupee may make imports more expensive and raise inflation, its a challenge the central bank can handle. Fortunately, India is far healthier in 2025 compared to 2013.
Screener: Stocks where foreign investors and mutual funds have increased their stake
FIIs and MFs increase their holdings in banks and NBFCs
As the shareholding data for Q3FY25 comes in, we look at stocks where foreign institutional investors (FIIs) and mutual funds (MFs) bought the most stakes. This screener shows stocks with the highest FII and MF holding increases in the latest quarter.
The screener is dominated by stocks from the banking, capital markets, IT consulting & software, and auto parts & equipment industries. Major stocks featured in the screener are Home First Finance, IDFC First Bank, GE Vernova T&D India, PNB Housing Finance, BSE, Godrej Properties, DOMS Industries, and Amber Enterprises.
Home First Finance features in the screener with the highest QoQ growth of 12.3 percentage points in FII holding in Q3FY25, while its MF holding increased by 4.9 percentage points QoQ. This comes after the housing finance company’s promoters, Aether (Mauritius) and True North Fund V LLP, sold a combined 9% stake in the company through the open market in December 2024. Home First's stock price has declined 1.2% over the past year.
Notable FIIs that bought the sold shares are Smallcap World Fund Inc (bought a 2.9% stake), Government Pension Fund Global (bought a 2.6% stake), and Goldman Sachs Funds - Goldman Sachs India Equity (bought a 1% stake). The largest MF buyers include Hdfc Mutual Fund - Hdfc Banking And Financial Serv (bought a 4.1% stake).
GE Vernova T&D India also appears in the screener after FIIs and MFs increased their stake in the company by 5.2 percentage points QoQ and 2.7 percentage points QoQ, respectively in Q3FY25. This industrial machinery stock’s promoters sold an 8.4% stake through an offer for sale (OFS) worth Rs 3,324.9 crore at a floor price of Rs 1,550 per share. This stake sale was likely a profit booking by the promoters after its stock price surged by 152.8% over the past year.
You can find some popular screeners here.
