In the National Assembly recently, the PM defended the decision taken by the Bank of Mauritius to raise interest rates by 0.25 percentage point and blamed it all on the mishandling of the economy by the previous Govt, notably by allowing for excessive monetary expansion, and a massive depreciation of the rupee.
Let’s review the trends in the rupee. Since the election of a new Govt in Nov 24, the depreciation in the rupee against its major trading partners, or the rupee effective exchange rate, was close to 5%, as shown in Graph 1 below.
In fact, the rupee is broadly on the same depreciating trend since Jan 2022, as shown in Graph 2 below.
The rupee started weakening sharply as from early 2020, with the onset of Covid-19, and depreciated sizeably by about 20% between Jan 20 and Jan 22, as shown in Graph 3 below.
Thus, like under the previous Govt, the rupee continues to weaken against the main foreign currencies, but more against the Euro than the US Dollar. Between Jan 24 and May 26, the rupee depreciated by 2% against the US dollar and by 14% against the Euro.
The depreciation of the rupee is in fact understated, since official exchange rates do not reflect true market rates. The foreign currency market continues to face a chronic shortage. The excess demand for forex is managed through unofficial exchange control measures by banks, under the directives of BoM.
Officially, like under the previously Govt, there is no scarcity of foreign exchange. And, the BoM continues, as under the previous Govt, to limit the supply of foreign exchange through restricted market interventions to meet excess demand. BoM, like in the past, keeps boasting of the growth in its foreign exchange reserves, which are boosted by foreign borrowings, and the sharp increase in gold valuation. This sits in sharp contradiction with the Govt message that public coffers are empty. If there is no forex scarcity and foreign exchange reserves are plentiful, then why should the rupee still be depreciating?
The PM seems to have forgotten that BoM raised interest rates by 0.50 percentage point in February 2025, soon after his Govt took office. As stated by BoM, that increase was meant to deal with the already prevailing excess liquidity that led to negative interest rate differentials between the rupee with foreign currencies, and to thus hold back rupee depreciation and potential inflation. The PM is now putting an old story into a new bottle.
BoM has instead justified its decision to raise the Key Rate last month mainly on the risks of higher inflationary pressures stemming from rising energy prices due to the Iran conflict. As I argued in my previous post, BoM has been allowing for higher monetary expansion, while the PM accuses the previous Govt of excess liquidity.
𝑾𝒉𝒆𝒏 𝒕𝒉𝒆 𝑷𝑴 𝒈𝒆𝒕𝒔 𝒊𝒏𝒕𝒐 “𝑰𝒕’𝒔 𝒂𝒍𝒍 𝒕𝒉𝒆 𝒇𝒂𝒖𝒍𝒕 𝒐𝒇 𝒕𝒉𝒆 𝒑𝒓𝒆𝒗𝒊𝒐𝒖𝒔 𝑮𝒐𝒗𝒕” 𝒎𝒐𝒅𝒆 , 𝒉𝒆 𝒔𝒉𝒐𝒖𝒍𝒅 𝒃𝒆 𝒎𝒐𝒓𝒆 𝒄𝒂𝒓𝒆𝒇𝒖𝒍 𝒊𝒏 𝒎𝒂𝒌𝒊𝒏𝒈 𝒆𝒓𝒓𝒐𝒏𝒆𝒐𝒖𝒔 𝒔𝒕𝒂𝒕𝒆𝒎𝒆𝒏𝒕𝒔 𝒐𝒏 𝒕𝒉𝒆 𝒓𝒖𝒑𝒆𝒆, 𝒍𝒊𝒌𝒆 𝒐𝒖𝒓 𝑷𝒂𝒅𝒂, 𝒘𝒉𝒐 𝒍𝒂𝒏𝒅𝒆𝒅 𝒖𝒑 𝒂𝒕 𝒕𝒉𝒆 𝑪𝑪𝑰𝑫.
