Mumbai: It is prudent at times to ignore what a central bank says and focus on what it actually does.
A case in point is the divergence between the Reserve Bank of India’s (RBI) recent intervention in the currency market and its stated position.
Even though the RBI maintains that it does not protect any particular level of the rupee, three currency dealers, requesting anonymity, said the RBI had been aggressively preventing the currency from touching its August 2013 all-time low of 68.85 per dollar over the past three trading sessions.
The rupee’s movement has been restricted to a narrow band of 68.45-68.69 per dollar since Monday, a reflection of this intervention.
“Today, they have been there almost every time the dollar/rupee goes closer to the all-time low. The dollar demand is strong across foreign banks because there is a fear in the market that the budget will not be friendly,” said one of the currency dealers cited above.
The rupee weakened to 68.79 per dollar to come within a whisker of its all-time low during mid-day trading on Thursday before closing at 68.71.
Concerns that the government may slip on fiscal consolidation and set a higher fiscal deficit target in its Union Budget scheduled on 29 February has turned foreign portfolio investors (FPIs) into net sellers of shares and bonds.
So far in calendar 2016, FPIs have sold $2.3 billion worth of shares and $605 million worth of bonds.
“Weak stocks are one reason, but today the (dollar) buying has been because of the derivatives expiry and settlement as well. But dollar supply has not been enough to match this outflow,” said a second currency dealer.
Month-end dollar demand from oil importers, weak local share indices and long dollar positions taken in anticipation of dollar repatriation by FPIs all piled pressure on the currency.
“There is no way that the rupee would have stayed away from reaching the all-time low if intervention support was not there. It is doubtful how long can they hold on to these levels or whether they would be willing to,” said the third currency dealer.
The rupee has become one of the worst performing emerging market currencies, having shed 3.76% so far in calendar 2016. Some analysts expect it to touch 70 per dollar in 2016.
As per the real effective exchange rate (REER), a trade weighted basket of 36 currencies tracked by the RBI, the rupee was overvalued by 13.6% in January.
“The rupee is enormously overvalued as per the REER which is why we have such a high trade deficit despite oil falling so sharply and import bill reducing,” said A V Rajwade, an independent foreign exchange expert.
To be sure, the RBI’s intervention in the market has increased in frequency since Raghuram Rajan took charge at the central bank in September 2013.
While it has been a net buyer of dollars in 20 of the 27 months between September 2013 and December 2015, RBI has been a frequent participant on both sides of the market. The central bank increased its ambit of intervention to include the exchange traded futures market in December.