BackDon’t lose sleep over the depreciating rupee yet
RBI, it seems, is among the most bearish on the exchange rate. So at the outside chance of rupee falling to even 68 to a dollar, India can handle it
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In the past one month, the rupee has lost 3% in value to become the worst-performing currency among its Asian peers. Red flags have been raised because with surging oil and unfriendly foreign investors, the Indian economy will be in trouble if its currency continues to weaken.
But not everyone is losing sleep over the exchange rate.
A look at a Bloomberg survey of forecasters shows that between March and now, not all have changed their view significantly on the currency. In fact, out of 36 analysts with updated forecasts, only 14 have indicated an expectation of a greater depreciation than previously foreseen, shows data from Bloomberg. Among these, the most bearish is Mizuho Bank with a call of 68 to a dollar by June. Recall that the historic low for the rupee was 68.85, which it hit in 2013.
According to a median of these 36 forecasters, the rupee would be at 65.27 to a dollar by June and 65.45 by March 2019. Analysts reckon that while 67 to a dollar (the current level of the rupee) is not alarming, it is most definitely uncomfortable.
The Reserve Bank of India (RBI) doesn’t seem to be losing sleep over the exchange rate. Currency dealers reckon that while the central bank has been intervening in the market, it hasn’t brought out its entire firepower to defend the Indian unit. “The dollar selling by public sector banks is a bit stronger than before but it is not dramatically different," said a senior currency dealer, requesting anonymity.
RBI’s calm comes from the fact that it has amassed a formidable $400 billion war chest of foreign exchange reserves. One could also argue that in the light of the recent relaxations on foreign investment in Indian debt, the central bank is fine with building reserves with volatile flows as well. “It would seem that for the RBI, the amount of forex reserves is very important, more so than the source through which it is built," said Abheek Barua, chief economist at HDFC Bank Ltd.
So when do we sound the alarm?
There is some clue in the monetary policy report that accompanied the April policy statement. The report states that RBI assumes “current level" for the rupee as baseline for its growth and inflation forecasts for FY19. The rupee at that time was trading around 65 per dollar.
The report also states that a 5% depreciation of the currency would add about 15 basis points to domestic inflation. RBI, it seems is among the most bearish on the exchange rate. So at the outside chance of rupee falling to even 68 to a dollar, India can handle it.
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