In war for rupee, no shock moves likely
RBI may not unveil any big unconventional tools at MPC meeting
Despite the rupee nearing the 82-mark to the dollar, currency market watchers believe that the Reserve Bank of India is unlikely to unveil any significant unconventional tools in its monetary policy committee meeting as the rupee is still an outperformer among emerging market currencies.
The rupee touched a record low of 81.94 against the dollar on Wednesday as the US currency continued to strengthen and comments by members of the US Fed Reserve bolstered expectations of further aggressive rate hikes.
Since 21 September, the rupee has weakened by 98 paise to 81.82 against the dollar. Until July, the rupee was hovering around the 79-80 levels, with RBI intervening in the markets to smoothen excessive volatility.
RBI has maintained it has zero tolerance for volatile and bumpy movements but has no specific level in mind for the rupee.
“RBI may take some measures to kill the unwanted speculation. But otherwise, we are not expecting any unconventional measures. There is no pressure on the reserve. Unconventional measures like restricting dollar outflow will be counterproductive. There is some offshore buying happening. If there are genuine flows, they won’t take measures to contract outflows,” said Sushanta Mohanty, general manager, treasury at Bank of Baroda.
RBI has so far drawn down its foreign exchange reserves by about $97 billion to $545 billion from a peak of $642 billion a year ago to defend the rupee against excessive volatility.
However, the expectations of aggressive monetary policy tightening by the Fed have pushed the dollar index to a 20-year high as investors worldwide fled to the relative safety of dollar assets, putting other currencies under pressure.
While the clamour for RBI to announce strong, unconventional measures has increased, currency dealers believe it’s not the right time for RBI to shock the system with any such actions.
“Given the dollar index is strengthening, definitely RBI will be looking at actions in the event INR is impacted significantly. But any heavy extraordinary measures are unlikely in this policy. While RBI will allow some amount of rupee depreciation, it might only step in if a meaningful depreciation happens,” said V. Lakshmanan, head of treasury, Federal bank.
That said, there is pressure on RBI to arrest the rupee’s slide as it’s a politically sensitive issue.
In July, RBI introduced measures to boost forex reserves, including regulatory relaxations and the opportunity to offer better rates on foreign currency non-resident bank deposits, permission for more overseas investment in Indian debt and higher limits for external commercial borrowings.
But these measures have had limited impact. RBI’s decision to allow banks to raise deposits from non-resident Indians by offering them higher rates has not resulted in a significant jump in forex inflows.
Still, the market is expecting RBI to come out with some measures to maintain the currency’s stability in the monetary policy to be announced on 30 September, besides raising the policy rates by a sharper-than-previously expected 50 bps. Among the measures is extending the deadline for the window on foreign currency deposits from 31 October to March, experts said.
To be sure, some currency dealers said RBI might have to announce some strong measures to ensure that the reserves don’t deplete further.
“We can expect some impact on reserves due to revaluation of other currencies, apart from intervention amount. While economically we are doing well, protecting the value of rupee by some measures by RBI will be a boost to the economy,” said Paresh Nayar, president, CR Forex.
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