RBI may boost reserves, cap rupee gains

According to currency dealers, in the recent past RBI had started buying dollars even when rupee had touched Rs 61.50

When it comes to boosting foreign exchange reserves, Reserve Bank of India (RBI) Governor Raghuram Rajan might not follow in the footsteps of his predecessor D Subbarao; he might step in to boost reserves and not allow the rupee to appreciate beyond 61/dollar.

Currency dealers said in the recent past, RBI had started buying dollars even when the rupee had touched 61.5/dollar. Therefore, most experts see the rupee trading at 61-63 a dollar this year.

Subbarao has been criticised for not boosting foreign exchange reserves when the rupee was appreciating due to dollar inflows, following quantitative easing by the US. In 2009-10, the rupee traded at 50.52-44.92/dollar. During that period, foreign exchange reserves stood at an average $273 billion. At the beginning of that financial year, the reserves stood at $252 billion; by the end, these stood at $277 billion.

“The rupee is seen to be fairly valued at 61-63/dollar, where exchange rate is competitive for exporters and off-shore direct investors. While it may be seen as costly for importers, a relatively weak rupee helps reduce consumption of both essential and non-essential import items, reduces the pressure on trade/current account deficits and ring-fences foreign institutional investors’ dependency to finance the current account deficit (CAD). This structural imbalance is a long-term risk on the rupee to bring a sudden bout of excessive one-way rupee weakness, when external liquidity is squeezed. To mitigate this risk, RBI needs to build strong and quality reserves to bring about long-term confidence on the rupee exchange rate,” said Moses Harding, group chief executive officer (liability and treasury management) & chief economist, Srei Infrastructure Finance.

So far, under Raghuram Rajan, who took over as chief of the central bank on September 5 2013, foreign exchange have risen reserves from $275 billion to $293 billion. During this period, the rupee has traded in the range of 66.12-61.04 a dollar.

“The rupee may trade in a 61-63-a-dollar band in 2014, with a bias towards weakening. The dollar is likely to strengthen, with higher growth in US and intensifying Fed tapering. Also, RBI needs to boost its forex reserves. Among other needs, cumulatively, till November, RBI will need to unwind net short forward dues of about $6 billion, arising mostly from bank medium-term notes and oil marketing company swaps. As a result of RBI buying dollars, the rupee is unlikely to strengthen much beyond 61 a dollar,” said Saugata Bhattacharya, chief economist, Axis Bank.

The Urjit Patel committee set up to revise and strengthen the monetary policy framework has said as a buffer against outflows, RBI’s strategy should be to build an adequate level of foreign exchange reserves. It added adequacy should be determined not only in terms of existing metrics, but also in terms of intervention requirements on the past.