Rupee slide puts spotlight on limits to India's currency defence

By Bhaskar Dutta and Pratigya Vajpayee

 

The Indian rupee’s rapid slide to successive record lows in recent weeks has analysts debating why the central bank has refrained from intervening more forcefully to support the currency.

 

A key reason is the Reserve Bank of India’s $64 billion short-dollar position — a pledge to supply large amounts of dollars in the future through derivatives contracts with lenders. This exposure constrains how freely the central bank can deploy additional dollars in the spot market to support the rupee. Sentiment has also been dented by foreign outflows out of local stocks and bonds amid delays in finalizing a trade deal with Washington. 

 

Although the RBI can draw on its foreign-exchange reserves, it faces limits on how aggressively it can act. Selling too many dollars raises the risk of rapid depletion at a time when India’s current-account deficit is expected to widen, partly due to the harshest US tariffs imposed on any Asian economy.

 

The large short-dollar position has “reduced the central bank’s willingness to sell dollars aggressively, leaving the rupee more exposed to flow-driven pressure,” said Kunal Sodhani, head of treasury at Shinhan Bank. IDFC First Bank Ltd. analysts also say that the large short-dollar book has constrained the RBI’s intervention capacity. 

 

Global funds have pulled about $18 billion from local shares this year. Outflows from debt have also accelerated this month. The withdrawals have worsened the strain on the rupee while the 50 per cent US tariffs threaten exporters’ dollar inflows. At the same time, firm imports are keeping demand for the greenback elevated.

 

The RBI’s relatively relaxed approach marks a shift from earlier interventions around the 89-per-dollar level in October and November. The stepback may be guided by its efforts to cushion exporters from the punitive US levies.  

 

“The RBI has to let the rupee act as a shock absorber as it would want to preserve its reserves at a sufficiently large level to maintain external resilience,” said Anubhuti Sahay, an economist at Standard Chartered Plc.

 

Adjusted for the short-dollar book, the import cover provided by the RBI’s foreign reserves has shrunk to about 10 months from 11 months earlier, she said.

 

The rupee has weakened about 2 per cent this month, hitting a new record low of 91.0837 per dollar on Tuesday. That takes its year-to-date decline to nearly 6 per cent, cementing its status as Asia’s worst-performing currency.

 

India remains among the few major economies yet to seal a trade pact with the US, although President Donald Trump last week spoke with Prime Minister Narendra Modi as negotiators work to resolve differences over the long-delayed agreement.

 

“The key issue at the moment is sentiment, which risks turning into a psychological spiral,” said Ashhish Vaidya, head of treasury at DBS Bank in Mumbai. “Having said that, a lot of the negatives are priced in for the rupee,” he said, estimating a broad trading range of 90-92 per dollar.