rediff.com
News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

Rediff.com  » Business » After rupee crisis, RBI shores up currency's defence
This article was first published 9 years ago

After rupee crisis, RBI shores up currency's defence

May 21, 2014 08:27 IST


Photographs: Reuters Suvashree Dey Choudhury and Neha Dasgupta

India's dollar reserves surged to $313.8 billion as of May 9, the highest since November 2011.

Even as money floods into India, the Reserve Bank is bracing for the worst, building up currency reserves and drafting a game plan to protect the rupee against the sort of rout that alarmed policymakers and investors last year.

Reserve Bank of India (RBI) Governor Raghuram Rajan is reviewing its exchange rate policy, three officials with knowledge of the matter said, after the rupee's drop to a record low in August spurred criticism that it was ill-prepared to manage a heavy sell-down by foreign investors.

The RBI is determined not to let that happen again, and is taking advantage of a rupee recovery on a flood of overseas money betting that Narendra Modi's Bharatiya Janata Party would sweep to power and set the stage for a revival in Asia's third-largest economy.

The BJP scored a resounding victory in vote counting on Friday, knocking the Congress party out of power after a decade.

"In 2009, 2010, there was this great hands-off approach. But now we are thinking of reserve accretion," said an official aware of the RBI's approach.

"We need to prepare ourselves against any kind of storm that is going to come up," he added.

The three officials declined to be identified because they were not authorised to speak with the news media.

...

After rupee crisis, RBI shores up currency's defence


Photographs: Reuters

While buying up dollars gives comfort against the prospect of a future sell-down, it can add to inflationary pressure by boosting rupee liquidity, and the RBI's push to build reserves is tempered by its deep-seated wariness of inflation, the officials said.

A potential flood of rupees into banks as a result of RBI dollar-buying may thus force it to "sterilise" excess rupees, removing them from circulation by selling bonds, they said.

However, the key plank of its foreign exchange management plan is to buy dollars whenever possible to build reserves, with no specific target on how much it wants, the officials said.

"RBI has learnt its lessons. In the current situation where there are so many uncertainties like elections, global spillover, Fed fund rate hike, no amount of reserves is high," one of the officials said.

Traders say the RBI tends to buy dollars when the rupee strengthens above 60 per dollar.

...

Tags: RBI , Fed

After rupee crisis, RBI shores up currency's defence


Photographs: Reuters

J.P. Morgan estimates that RBI purchases since February have totalled nearly $20 billion, including $4.1 billion in May.

As a result, India's dollar reserves surged to $313.8 billion as of May 9, the highest since November 2011, from a more than three-year low of $274.8 billion in September, when the RBI defended the rupee aggressively by selling dollars, according to RBI data.

The RBI does not officially target a level for the rupee, but does step into the market to smooth volatility.

"The RBI maintains a foreign exchange reserve buffer that is commensurate with the needs of the Indian economy," the central bank said in an emailed response to a query by Reuters.

...

After rupee crisis, RBI shores up currency's defence


Photographs: Reuters

Rupee Review

Meanwhile, an RBI committee is reviewing measures rolled out last year to stabilise the rupee, according to one of the officials.

Those steps included currency swap concessions for banks raising money from abroad and a special dollar window to state oil companies.

The measures, along with finance ministry steps such as curbing gold imports, were widely credited with stopping the rupee rout.

Rajan, who took office at the RBI on Sept. 4, wants a list of options ready in the event that the rupee comes under pressure again, the person said.

Traders believe that in the event of another sell-down, the RBI would re-introduce curbs on trading on leverage.

They also say it could take unprecedented steps such as intervening in non-deliverable forwards markets overseas through state banks.

...

After rupee crisis, RBI shores up currency's defence


Photographs: Reuters

Fragile No Longer?

The rupee has surged 18 percent since hitting a record low of 68.85 in August, far outperforming other emerging market currencies such as the Brazilian real and Indonesian rupiah.

The RBI is also wary of a sharp appreciation in the rupee, which might render the exchange rate less competitive for exporters, one of the officials said.

India's import cover - the amount of imports covered by reserves - stands at eight months, according to Bank of America-Merrill Lynch. That is the highest since October 2011 and up from about six months in the midst of the rupee crisis.

Dollar purchases have the added benefit of capping gains in the rupee, which the RBI sees as too strong in real effective exchange rate terms and not properly reflective of India's high inflation, the officials said.

David Loevinger, managing director of emerging markets at Los Angeles-based investment manager TCW Group, said the RBI does not need to add much more to its reserves.

...

After rupee crisis, RBI shores up currency's defence


Photographs: Reuters

India's once-wide current account deficit has narrowed since the government imposed curbs on gold imports last year, and its reserves are now about 1.7 times its deficit and external debt due in a year or less, he said.

By that measure, India now has the highest foreign exchange reserve cover among the group of countries including Brazil, Indonesia, South Africa and Turkey known last year as the Fragile Five.

"It's like buying insurance. You want to buy only that much insurance that will be required during emergencies. Otherwise you will end up paying an unnecessarily big premium," Loevinger said.

Source: REUTERS
© Copyright 2024 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.