Mumbai: The Reserve Bank of India (RBI) may shift its currency intervention strategy to allow the depreciation of the rupee in line with its emerging market peers to retain export competitiveness and cushion the negative impact of its US dollar sales on domestic liquidity.
Traders say that currency hedging by exporters and importers signal further slide as positions have turned with importers rushing to cover their exposure, while exporters are letting their positions open to benefit from the slide.
The rupee may slide as much as 2.5% in the next few months against the US dollar to as low as 88 as the overall rally in the Greenback is likely to accelerate given rising yields in the US and the thinning of expectations of further interest rate reduction by the Federal Reserve.
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"Excessive FX intervention can work if currency pressures are transitory," said Sonal Varma, economist at Nomura Securities. "Otherwise, there is a risk that, as FX reserves fall, currencies become vulnerable to speculative attacks. Heavy unsterilised USD selling can also tighten domestic liquidity and worsen growth prospects.''
RBI may Limit Interventions to Keep Rupee Competitive
Agencies
The RBI is estimated to have spent as much as $100 billion to intervene in the currency market - in spot as well as non-deliverable forwards markets. While this has reduced the loss of value, it has squeezed domestic liquidity as every dollar sale resulted in equivalent amounts of rupee getting into the central bank's coffers. The rupee has depreciated 2.4% from September to 85.97/$1 as of January 10. During the same time period, the Malaysian ringgit depreciated 3.1%, the Philippine peso depreciated 3.4%, the Singapore dollar depreciated 4.8% and the Japanese yen depreciated 7.3%, Bloomberg data showed.
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"Excessive FX intervention can work if currency pressures are transitory," said Sonal Varma, economist at Nomura Securities. "Otherwise, there is a risk that, as FX reserves fall, currencies become vulnerable to speculative attacks. Heavy unsterilised USD selling can also tighten domestic liquidity and worsen growth prospects.''
The RBI is estimated to have spent as much as $100 billion to intervene in the currency market - in spot as well as non-deliverable forwards markets. While this has reduced the loss of value, it has squeezed domestic liquidity as every dollar sale resulted in equivalent amounts of rupee getting into the central bank's coffers. The rupee has depreciated 2.4% from September to 85.97/$1 as of January 10. During the same time period, the Malaysian ringgit depreciated 3.1%, the Philippine peso deprec ..
Heavy interventions have created ripple effects, including tighter banking system liquidity and reduced export competitiveness. Other Asian currencies have depreciated by over 2% against the dollar in the same period, adding to the rupee's challenges. This interventionist policy has also spurred speculative activity, with traders and hedge funds positioning themselves short on the rupee, expecting the RBI to intervene on both sides of the market.
"This mismatch could have been avoided if the rupee had been slightly weaker and closer to the fair exchange rate," Sahay said.
A further depreciation of the rupee would not have had a significant impact on inflation or growth either. RBI estimates from the Monetary Policy Report show that a 5% depreciation in the rupee pushes up headline inflation by 35 basis points and impacts growth by 25 basis points. The rupee has depreciated 2.4% since September, according to Bloomberg data. One bas ..
“Inflation impact, especially on the core inflation, would not be drastic and inflation would have been higher by about 10-20 basis points. On the flip side, our loss of competitiveness on the export front would not have been so dire,” said the treasury head at a foreign bank.
The banker also pointed out that the overvaluation of the currency in terms of real effective exchange rate (REER) - a measure of the value of a currency against a weighted average of several foreign currencies - w ..
“The present REER level is a different kind of overvaluation. If the RBI had been a little more relaxed in letting the rupee depreciate, the REER would be at 104-105 levels,” the banker said.
Banking system liquidity slipped into deficit as a direct consequence of foreign exchange interventions. System liquidity stood at a deficit for January at Rs 1 lakh crore and for December at Rs 68,469 crore despite a 50 basis point CRR cut to 4% which infused Rs 1.16 lakh crore.
Source Name : Economic Times