Central bank steps to help rupee strengthen

Currency experts see rupee trading at 58.63 against $ by end-August

In the near term, the rupee is expected to strengthen from current levels on the back of measures taken by the Reserve Bank of India (RBI) to arrest its fall.

The median of forecasts from 10 currency experts surveyed by Business Standard says it is expected to trade at 58.63 a dollar by end-August. It ended at Rs 59.35 on Friday, compared with Thursday’s close of 59.68. It had opened at 59.72 and during intra-day trade, touched a high of 59.30 and a low of 59.87.

“Building on last week’s measures, which included restricting banks from trading currency derivatives, drastically cutting net open positions on currency futures, and raising related margin requirements, RBI announced further liquidity tightening measures. Rupee volatility will most likely continue to decline in response to the recent measures. Depreciation pressure on the exchange rate would, however, abate only when capital flows stabilise and the trade deficit begins to ease,” said Taimur Baig and Kaushik Das of Deutsche Bank in a note to clients.

RBI has also been intervening in the forex market through state-run banks, due to which these assets have been depleting. RBI data suggest that as on July 12, foreign currency assets fell to $252,136 million, from $261,513 million on April 5.

On Monday, RBI delivered a surprise 200-basis points rise in the Marginal Standing Facility, along with capping banks’ total of daily repo borrowing to Rs 75,000 crore, plus the announcement of the absorption of market liquidity through the open market sale of government securities. “The moves were targeted to push short-term interest rates sharply higher, thereby making forex speculation costlier. A similar strategy was adopted by RBI in January 1998, after the Southeast Asian currency crisis in November 1997, to combat heightened forex market volatility,” said Siddhartha Sanyal and Rahul Bajoria of Barclays Capital in a note to clients.

However, they added, a critical difference between the two economic scenarios was the wide difference in foreign institutional investor (FII) investments in India, particularly in equity. Such investments used to be miniscule in 1998; today, it is about $200 billion in the BSE500 companies. Sanyal and Bajoria are feel the RBI moves can lead to FII outflows. And, that these moves are insufficient to stabilise the rupee.