Does the RBI have an option if the rupee dramatically rises to 80 and above against the US?
The Reserve Bank of India (RBI) has a wide range of policy options to deal with any sharp devaluation of the rupee against the US dollar. The rupee is currently trading at 77.55 against the US dollar
These include allowing banks and financial institutions to increase dollar deposits, raising domestic credit limits for foreign investors, discouraging certain imports, including higher tariffs, and encouraging exporters to return dollar earnings. Indicating the withdrawal of surplus liquidity, the RBI, facing a sharp devaluation of the rupee, has decided to allow foreign currency deposits, including discounts on hedging costs. In fact, banks have raised about $ 35 billion through this lucrative path, which has helped to test the rupee’s devaluation.
“The RBI may feel comfortable taking no action to put pressure on exporters. However, if necessary, it may ask exporters to return dollars quickly. It would be disgraceful to impose a restriction on outflows. So, I do not expect any restrictions on outflows until the RBI is pushed to the wall, “said Anil Kumar Bhansali, Treasury chief at Finrex Treasury Advisors.
“The inclusion of Indian debt in the global bond index could be a big explosion in the flow of capital. This will increase the participation of Indian paper in the global non-judgmental investment flow. The announcement of intent may be a significant compliment in itself.” Has done 8
The central bank’s outlook has kept the rupee under pressure against the US dollar due to recent uncertainties, rising inflation and higher oil prices in the wake of rising interest rates in the domestic and global markets. Indeed, yesterday’s US inflation data was higher than expected, creating a strong case for a further 50 basis point increase in the US Fed rate from the current 0.75-1.0 percent.
“The central bank has used some of its reserves to prevent a major currency depreciation, and the RBI does not feel comfortable with keeping its reserves below the $ 600 billion mark,” said Gourang Somaiya, a forex and bullion analyst at Motilal Oswal Financial Services.
“We expect the RBI to continue to actively intervene and, at some point, start building its FX reserves again to create a buffer for future uncertainty,” Somaiya added.
The combination of RBI’s intervention in the forex market through dollar sales and the depreciation of the foreign exchange reserves have already reduced the country’s foreign exchange reserves from $ 640 billion to $ 600 billion. Does the forex reserve (say, 550 billion) have a tolerance limit below which the RBI will stay out of the forex market?
Adequate levels of foreign exchange reserves are actually measured in terms of import cover as well as short-term foreign exchange loans.
“India’s imports are close to $ 55 billion per month. According to a conservative estimate, the country needs to have a reserve equivalent of 10-11 months. According to this parameter, the current reserve of $ 600 billion is sufficient,” the state noted.
The second approach is to look at the country’s total short-term debt liability over the next one year, which currently stands at about $ 100 billion.
“The RBI has a long 49 billion in foreign exchange reserves, in addition to the $ 600 billion in reserves, which could be used by them to protect against the sharp devaluation. So, in fact, they have $ 650 billion to protect the value of the rupee. They could use another $ 50 billion to intervene. The strategy would be to allow a slow depreciation with some valuation so that importers could be protected somewhat. Overall, the trend will be devalued until we see a reversal. Off Treasury, Finrex Treasury Advisors 7
“The RBI will consider the worst case scenario where FDI inflows occur, trade deficits need to be financed and short-term lending services provided. This will put a lot of pressure on the rupee. In that case, it makes sense. “It simply came to our notice then.
Read more: Rupee opens at 77.52 / বন vs. Wednesday closes 77.24 /
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