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Rupee weakens to a new low; traders see currency breaching 79/$ soon
Rupee falls 18 paise to close at new low of 79.03 against US dollar
Business Standard

RBI may need to tweak forex strategy, let rupee weaken, say analysts

To control the tumble, the Reserve Bank of India (RBI) has sold dollars in the spot market and simultaneously bought and sold in the forwards market.

Topics
Reserve Bank of India | Forex  | Rupee

Reuters  |  MUMBAI 



Photo: Bloomberg
Photo: Bloomberg

By Swati Bhat

MUMBAI (Reuters) - India's central bank may need to change the way it seeks to slow the rupee's decline, analysts and traders say, with its current method of intervention in the forwards market now only accelerating the currency's fall.

The has hit a series of record lows this week and is within striking distance of the psychologically important 79-to-a- level, as concerns around growth, portfolio outflows, high global crude prices and sustained inflation weigh. [INR/]

To control the tumble, the (RBI) has sold dollars in the spot market and simultaneously bought and sold in the forwards market.

However, traders say the RBI's actions in the onshore forwards market have led premiums to crash sharply with the 1-year annualised forward premium now below 3%, levels last seen in November 2011, wiping out carry trade gains and pressuring the spot price lower.

"Maturing forward contracts are suspected to be weighing on the currency this week, besides an unsupportive macro backdrop of a portfolio outflows, high oil and bid dollar," said Radhika Rao, senior economist with DBS Bank.

Those technical conditions have made forward market intervention a less-than-ideal tool for managing volatility and left the RBI with fewer options to reduce the risks of capital flight.

SPOT MARKET INTERVENTION

RBI could make greater use of spot market intervention - which would run down central bank reserves - or may just opt to let the rupee weaken according to macroeconomic fundamentals.

"In the short-term, intervention strategy might return to the spot to meet demand, in light of a sharp fall in forward premiums," Rao said.

At $590.6 billion, the reserves give RBI enough firepower to halt the slide in the currency but it is unlikely to intervene aggressively against fundamentals.

The rupee was market-determined, but the RBI would not allow "runaway depreciation" in the currency, its chief Shaktikanta Das said last month.

The rupee has held up relatively better than its Asian peers on account of the central bank intervention but with a widening trade and current account deficit (CAD) and sustained foreign portfolio outflows, the downward pressure has intensified.

"We believe INR could weaken towards 81 to a before the end of FY23," QuantEco Research said in a note.

Falling FX reserves, persistently high commodity prices, limited exchange rate pass-through to inflation and elevated INR valuations will likely tilt the balance towards a less interventionist FX policy in the coming months, Madhavi Arora, senior economist at Emkay Global said.

"Allowing INR to gently weaken over time is the right strategy, giving CAD space to improve," Arora said.

 

(Editing by Sam Holmes and Alex Richardson)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Wed, June 29 2022. 15:56 IST

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