India’s central bank has put all kinds of support around the rupee, and it’s only just stopping the currency from hitting a record low.
The currency is 0.2% away from its weakest level of 96.97 rupee against the dollar touched in May, highlighting investor worries over elevated crude prices while global yields surge. The Reserve Bank of India’s intervention contributed to its foreign exchange stockpile plummeting $51 billion in the four weeks through Oct. 2, while the first rate hike in nearly four years did little to stem the slide.
“The sharp decline in the RBI’s reserves is a cause of concern and it is something that the market is closely watching,” said Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services Pvt. “At present, the central bank’s intervention is the only factor that is keeping the rupee where it is.”
India’s reserves fell for a fourth straight week to $734 billion on Friday, after touching a high of $785 billion in the week through Sept. 4, as RBI’s special window to attract dollar deposits drew $133 billion. The sharp drop in the pile suggests more than a third of those inflows have already been lost. The fall also partly reflects the impact of a stronger dollar.
RBI Governor Sanjay Malhotra on Wednesday sought to allay concerns, saying reserves continue to remain adequate with import cover of around eleven months and external debt of 94.4%. He also said the rupee may be undervalued and markets can be irrational in the short run.
The rupee is down more than 7% this year in Asia’s worst performance as India being a major oil importer remains vulnerable to the Middle East conflict. Global investors have sold almost $30 billion of local stocks this year. Surging US bond yields are also weighing on the rupee as Indian assets become less attractive to foreign investors.
The RBI has been selling dollars in the spot market to defend the rupee and doing sell/buy swaps in forwards to remove excess liquidity — both of which are leading to drop in the headline reserves, traders said. The central bank’s negative forward book of $200 billion, which reflects its repayment obligations, means effective reserves are even lower.
The RBI changed its stance to calibrated tightening Wednesday, signaling further hikes as price pressures intensify. Yet the rupee slid as traders viewed the measures as inadequate to offset the forces pushing the currency lower. The currency was little changed Thursday after gaining as much as 0.1% to 96.68 a dollar with traders citing RBI intervention.
“The central bank has been put into a very difficult spot and to my mind the only way out of this spiral is to hike rates sufficiently like about a 100 basis points in one go,” said Ashhish Vaidya, head of treasury at DBS Bank Ltd. in Mumbai. “The longer the geopolitical conflict persists and oil remains high our window to manage this will get narrow and narrower.”
HDFC Bank Ltd. sees the currency pair in a range of 96-98 for the second half of the fiscal year that ends in March. A breach of 97 could see the rupee at 98.50, according to Mecklai.
“Interest-rate hikes offer a weak defence in the short term for the currency and the weakness in being driven by broader factors including oil prices, equity valuations and FII outflows, AI trade and US dollar strength,” HDFC Bank principal economist Sakshi Gupta wrote in a note. She expects the central bank will continue to “actively intervene in the FX market to limit the pace of depreciation in the rupee.”
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