by J. Banker
On Tuesday, the Prime Minister assured the National Assembly that forex availability has improved — then conceded the market “remains tense” and companies are accumulating foreign currency. Reassurance and concession cannot both be true: the market is dislocated, and there has been a crisis of confidence in the rupee since the COVID shock of 2020. As for the “decisive measures” — circulars, guidance, 75 basis points across two hikes — they extend the playbook of Rama Sithanen, the governor gone inside a year: sterile actions then, sterile still under Governor Thakoor. Whoever briefs the Prime Minister is reading a dead man’s notes.
The market tells the story his briefers omit. Start with the basics: one currency, three prices — the official near 47; the offshore at 49–50, some 5% above; the money-changer in between. No depth: a handful of trades sets the price. No two-way flow: everyone buys, nobody sells, banks ration, retail investors hoard dollars. Controlled bid-offer spreads, imposed in an illiquid market, kill the incentive to quote. Rates transmission is broken: those hikes never reached the exchange rate.
For the rupee, carry is pure fiction
The claim that the interest-rate differential drives the MUR? Wrong on both legs. Carry — borrowing a low-yielding currency to invest in a higher-yielding one — needs working FX and rates markets: a currency that can be borrowed offshore, hedged forward and settled globally, and a deep, liquid yield curve to invest along. The MUR has neither. No offshore funding, no functioning forwards, no curve — for the rupee, carry is pure fiction, and in a broken market the price of a dollar is set by scarcity and fear, not rate differentials.
The rupee does not trade or clear like a G20 currency: no proper FX benchmark fixing, no global clearing across time zones. The bond market is fragmented and excluded from global benchmark indices; the capital markets — for a country that aspires to be a leading international financial centre — are small and underdeveloped.
Here lies the problem: the rupee has traded on confidence since the COVID shock, and confidence is gone. Three rates on one screen are what a crisis of confidence looks like — dislocation the symptom, distrust the disease. A six-year verdict in three words: credibility, confidence, signalling.
The Bank makes arbitrary rules
First, credibility: none is left. The Bank does not build the market; it makes arbitrary rules — pricing by circular inside what should be a freer float with an open capital account. Then the interventions: the Bank sells dollars — dealers report, some 5% below where the offshore market clears. The dollars at the official rate are absorbed; the shortage persists. Reserves spent, price unmoved — a bonfire lit in instalments.
Second, signalling: zero. When did a BoM statement last move the FX market a cent? When did it last say what it would do — and do it? Silence is a signal, and for six years it has said nobody is at the wheel.
Third, and deepest, the crisis of confidence — and the Prime Minister, also Minister of Finance, made the case himself at a Bank of Mauritius event: people are hoarding dollars. He is right — exporters delay converting, importers stockpile, families hoard under the mattress. But hoarding is no moral failing; it is a rational, legitimate verdict on his central bank. He blames the previous regime, which indeed failed to stabilise the currency after the COVID shock — but history is not absolution. His own “dream team” has had two years: a governor consumed in under one, a currency split in three, scarcity deeper still. They have not cracked the problem; arguably, they have worsened it — because the same people and the same policies of the previous regime have persisted.
The remedy nobody will voice: let the rupee stabilise where it trades. A credible 49 beats a fictional 47, because confidence unlocks supply — once dollars stop being a one-way bet, the hoard comes out.
Nor will the world wait. Consider what stabilising a currency takes: when the yen sank to 40-year lows, the Bank of Japan unleashed some $50–60 billion — and the New York Fed joined it, selling euros to buy yen in the first coordinated support since 1998. Banks were warned in advance, execution was synchronised, follow-through confirmed; the yen steadied. Yet even that machinery, that credibility, kept only half the rally. The Iran war has shut Hormuz and pushed Brent past $120; real rates climb; Fed Chairman Kevin Warsh calls 2% a “firm, fixed target”. Every extra point of dollar yield pays the bet against the rupee — amplifying the very hoarding the Prime Minister deplores.
The weapon it never learned to wield: credibility
And the BoM’s arsenal? A $10 billion gross headline — net of bank deposits, earmarked balances and borrowed dollars, far less usable, and not growing. Unlike the Bank of Japan with its near-$1 trillion war chest, the BoM lacks the reserves to defend the rupee aggressively. This fight cannot be won with the balance sheet; its one weapon is the one it never learned — credibility.
And a weapon needs skilful leadership. The Governor comes from the IMF — with the textbook playbook of the Fund and academia, for a market that runs on positioning, liquidity, risk and nerve. That can work — provided she is backed by deputies and a special-forces markets team. She is not. Neither Deputy Governor has capital markets experience: no market-making, no proprietary trading, no liquidity provision, no risk-taking — never run an FX book, never warehoused a position. Section 14(2) of the BoM Act demands “recognised experience in banking or financial matters” — the public is owed an answer, twice over. Beneath them, recycled senior management drafts the replies Parliament must believe. Markets read people before policies.
Warsh moves world markets with a sentence; Port Louis cannot move the rupee with the limited firepower of its reserves. The repair is confidence and credibility: the right people and ideas — communication and signalling the market can trust — and capital markets built to global standard, for no aspiring financial centre trades its currency at three prices. Get that right, and USD/MUR can stabilise and liquidity return. Until then, the offshore market keeps voting 49–50 against an official 47 — and the liquidity crunch will persist.