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Tag: Indian Rupee

  • RBI’s 2013 playbook to rebuild FX reserves unlikely to work, say experts

    RBI’s 2013 playbook to rebuild FX reserves unlikely to work, say experts

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    The Reserve Bank of India’s 2013 playbook to buffer the domestic currency against steep declines and rebuild foreign exchange reserves is unlikely to prove fruitful in the current crisis as economic fundamentals are vastly different, analysts said.

    India’s forex reserves have tumbled about $110 billion from a peak of $642 billion in September last year, and though that is largely due to the fall in the value of holdings in dollars and other currencies, another significant reason is the central bank’s intervention in the currency market to protect the rupee.

    The local unit fell about 11% against the U.S. dollar in 2013, a slide it has already matched so far this year, with most market participants expecting further declines by the end of 2022.

    To defend the rupee, the Reserve Bank of India has dipped into its forex reserves. It has sold a net $43.15 billion worth of dollars since the start of 2022, including $4.25 billion this August, the latest available data released on Monday showed.

    “It would be important to rebuild FX reserves for sure. There will be urgency as fundamentals are also adverse,” said Madan Sabnavis, chief economist at Bank of Baroda.

    The RBI, in July, announced some measures to liberalise foreign exchange inflows, including giving foreign investors access to a larger portion of government debt and banks wider room to raise more deposits from non-residents. But these measures are unlikely to prove as effective right now as they had in 2013.

    Unprofitable Spreads

    Back in 2013, the RBI had offered to swap the U.S. dollars banks had raised via foreign currency non-resident (FCNR) deposits or foreign currency funding for rupees at concessional rates.

    It swapped FCNR deposits, with a maturity of three years or more, at a fixed rate of 3.5% per year, which was about 3 percentage points less than market rates at the time, while it swapped foreign currency funding at 1 percentage point below market rates. 

    These two swap windows had brought in around $34 billion at a crucial time, with $26 billion via the FCNR route alone.

    But these methods are unlikely to be as fruitful now.

    “The FCNR deposits route might not be as effective this time around, including for reasons like a narrower US-IN rate spread and less aggressive rate hikes in this cycle versus back in 2013,” said Radhika Rao, senior economist at DBS Bank.

    This time around, with India’s 3-year bond yields at 7.5% and U.S. yields at 4.5%, the 3% spread is unlikely to help investors make any profits on a fully hedged basis given the current hedging cost is about 6.5%-7%. Profits are unlikely even if the RBI offered a discount window, which it hasn’t so far.

    “On fully hedged basis, a similar level of subsidy will not be good enough. Either domestic rates have to go up tremendously or the RBI will have to increase the subsidy to make things work,” said Vivek Kumar, senior economist at QuantEco Research.

    Import Cover

    To add to the problems, India’s economic fundamentals too have weakened. The current account deficit has been widening and is expected to stay above 3% of gross domestic product for the current fiscal year, ending March 2023.

    With capital flows also volatile, economists expect the balance of payments to be negative, depleting reserves further.

    And while reserves at current levels are adequate to cover more than eight months of imports, analysts say a sustained depletion could cause some concern.

    “A fall below eight months of import cover (about $500 billion) could start catching the market’s attention if the current account deficit stays above 3% of GDP,” said QuantEco’s Kumar.

    “A panic situation prompting a forceful policy response could emerge if reserves touch six months of import cover, i.e., around $380 billion.”

    Possible Measures

    Analysts said while short-term fixes could provide intermittent relief, policymakers would need to continue focussing on strengthening structural macro buffers.

    Bank of Baroda’s Sabnavis suggested floating sovereign bonds, like the Resurgent India bonds (RIBs) India Millennium Deposit bonds (IMDs) in the past, to help boost forex reserves.

    “Such measures can directly bring in dollars,” he said.

    Sabnavis said the rupee could weaken further towards 82-83 levels in the near-term and fall to 84 if the dollar continues to strengthen. The local unit is currently at 82.28 per dollar.

    “Hard to really gauge the level, and expectations tend to be adaptive based on how RBI reacts.”

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  • ‘Rupee is not sliding, dollar is strengthening,’ says FM Nirmala Sitharaman

    ‘Rupee is not sliding, dollar is strengthening,’ says FM Nirmala Sitharaman

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    Finance minister Nirmala Sitharaman, who has been speaking about India’s growth story and robust economy during her recent interactions, has said that in the current scenario, the Indian the rupee is not sliding, but the US dollar strengthening.  Replying to a question, Sitharaman said: “Dollar is strengthening incessantly. So obviously, all other currencies are performing against the strengthening dollar. I am not talking about technicalities but it is a matter of fact India’s rupee probably has withstood this dollar rate going up…I think the Indian rupee has performed much better than many other emerging market currencies.” 

    She said that the Reserve Bank of India (RBI) was focused on ensuring that there isn’t too much volatility and was not intervening in the market to fix the value of the Indian currency. 

    Responding to questions asked by news agency ANI on measures being taken to tackle the slide, she said: “The efforts of RBI are more towards seeing that there is not too much volatility, it is not to intervene in the market to fix the value of the rupee. Containing the volatility is the only exercise RBI is involved in and I have said this before that rupee will find its level,” she said. 

    The depreciation of the rupee is a cause of concern, especially for a country that has significant imports, as per experts. On Friday, the rupee closed at 82.19 against the US dollar amid a firm greenback overseas and sliding crude oil prices. 

    At the interbank foreign exchange market, the local currency opened at 82.26 and witnessed a high of 82.12 and a low of 82.43 before settling at 82.19. The dollar index, which gauges the greenback’s strength against a basket of six currencies, advanced 0.56 per cent to 112.99. 

    As per experts, the latest round of depreciation is due to adverse global developments starting with the geopolitical tensions triggered by the Russian-Ukraine war. The war pushed up commodity prices, leading to a record surge in inflation in the developed world, which has resulted in steep rate hikes by the US Fed. This has resulted in a flight of capital back to the US, hence resulting in currency depreciation episodes. 

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  • IMF warns central banks against taking this one step as they fight strong US dollar

    IMF warns central banks against taking this one step as they fight strong US dollar

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    The International Monetary Fund (IMF) on Friday put out a detailed note suggesting ways the countries can respond to a strong US dollar, which has weakened other currencies significantly, including the rupee. The Indian rupee has fallen over 8% since January this year and is currently trading at over 82 per dollar. 

    Currently, the dollar is at its highest level since 2000, having appreciated 22% against the yen, 13% against the Euro, and 6% against emerging market currencies since the start of this year. The spike in the dollar began after America’s central bank – Federal Reserve – started raising the interest rate in order to fight super hot inflation in the US. 

    In a blog post, IMF’s Gita Gopinath and Pierre-Olivier Gourinchas said that a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the dollar in international trade and finance.

    While the US share in world merchandise exports has declined from 12% to 8% since 2000, the post said, the dollar’s share in world exports has held around 40%. For many countries fighting to bring down inflation, they said, the weakening of their currencies relative to the dollar has made the fight harder. 

    They noted that approximately half of all cross-border loans and international debt securities are denominated in US dollars and as world interest rates rise, the financial conditions have tightened considerably for many countries.

    In these circumstances, the paper said, several countries are resorting to foreign exchange interventions. Total foreign reserves held by emerging markets and developing economies fell by more than 6% in the first seven months of this year.

    The IMF said that the appropriate policy response to depreciation pressures requires a focus on the drivers of the exchange rate change and on signs of market disruptions. “Specifically, foreign exchange intervention should not substitute for warranted adjustment to macroeconomic policies,” the agency said, adding that there is a role for intervening on a temporary basis when currency movements substantially raise financial stability risks and disrupt the central bank’s ability to maintain price stability.

    As of now, it said, economic fundamentals are a major factor in the appreciation of the dollar: rapidly rising US interest rates and a more favorable terms-of-trade — a measure of prices for a country’s exports relative to its imports — for America caused by the energy crisis. It further said that given the significant role of fundamental drivers, the appropriate response is to allow the exchange rate to adjust while using monetary policy to keep inflation close to its target. 

    “The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt. Fiscal policy should be used to support the most vulnerable without jeopardizing inflation goals,” the paper underlined.

    The IMF has advised the countries to use their foreign reserves prudently. It said emerging market central banks have stockpiled dollar reserves in recent years but these buffers are limited and should be used prudently. “Countries must preserve vital foreign reserves to deal with potentially worse outflows and turmoil in the future,” the paper warned.  

    In the past few months, many countries have tried to arrest the decline in their currency by selling dollars. India’s central bank, too, has sold over 110 billion dollars in the last 13 months. India’s forex reserves have now plummeted to 532 billion dollars from the record high of 642.45 billion registered on September 3, 2021.     
     
    Gopinath is the Deputy Managing Director of the IMF and Gourinchas is the Economic Counsellor and the Director of Research. 
          
     

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  • Indian rupee’s depreciation essentially due to strengthening of dollar index: SBI chairman

    Indian rupee’s depreciation essentially due to strengthening of dollar index: SBI chairman

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    The Indian rupee has weakened essentially due to the strengthening of the dollar index but it is holding well as compared to currencies of other emerging market economies, State Bank of India Chairman Dinesh Khara said.

    Depreciation of the rupee is a cause of concern, especially for a country that has significant imports, Khara told PTI in an interview on the sidelines of the annual meeting of the International Monetary Fund and the World Bank here on Friday.

    The rupee closed at 82.19 against the US dollar on Friday amid a firm greenback overseas and sliding crude oil prices.

    At the interbank foreign exchange market, the local currency opened at 82.26 and witnessed a high of 82.12 and a low of 82.43 before settling at 82.19.

    The dollar index, which gauges the greenback’s strength against a basket of six currencies, advanced 0.56 per cent to 112.99.

    The Indian rupee is doing pretty well, Khara said.

    “Better than us was only Indonesia, which is generally a commodity economy and Brazil. So, these are the only two currencies which did better than us,” he said.

    “It is essentially the strengthening of the dollar index… which is the cause of the weakness that we have seen in the rupee,” he said.

    “I would say that the (Indian) currency has not behaved as volatile as perhaps the rest of the global currencies,” he added.

    Khara said even though the rupee is holding ground, its depreciation is a cause of concern.

    “It is very much a cause of concern, particularly for an economy which has got significant imports. But… when the dollar is struggling, how much can the rupee hold? Still, I think in the given situation and circumstances, the rupee is holding well,” he said.

    Referring to the interventions by the Reserve Bank of India, he said they are ways to check volatility.

    “Typically speaking, financial markets don’t really appreciate the volatility. It is also one of the functions (of the RBI) to ensure orderly movement of the currency,” he said.

    “To that extent, it is more or less holding its value. But in the larger interests, perhaps some kind of interventions are required. And that is being done,” he said.

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