The Reserve Bank of India (RBI) is expected to intervene at around Rs 52 per dollar levels in order to smoothen the currency's movement and to build up on foreign exchange reserves. Market participants are of the view that any dollar purchases by the central bank may spur similar action by the importers who are waiting on the sidelines for better rates.
"We expect the RBI to revert to its late-1990s tactics of buying during risk on and selling during risk off. This should stabilize rupee expectations in a Rs 52-56 per dollar range," said Indranil Sen Gupta, India economist at Bank of America Merrill Lynch. He added that the central bank is likely to buy (or unwind forwards of) $5bn if the rupee stabilizes at Rs 52 per dollar levels with the dollar settling at $1.30 per euro.
The central bank's outstanding net forwards sale has increased to $14.5 billion in July 2012. The RBI had resorted to intervention in the forwards market in order to avoid disruption in rupee liquidity arising out of spot dollar sales. Top RBI officials have assured that the unwinding of forwards sales will take place in a phased manner.
Rupee appreciated by 4.8% in September 2012. The currency registered about 2% intra-day gains on two occasions post announcements on reforms. Today, rupee closed at Rs 52.17 against the greenback, its highest level in past five months.
"There are no signs of RBI buying dollars as of now. If RBI comes, we expect importers to rush and cover their positions," said a foreign exchange dealer with a forex consultancy firm.
From it's peak in August 2011, rupee lost about 30% on its way down to the record low of 57.16 per dollar in just 11 months. Since then, rupee has traced its way back by 8.3% in about three months.
Sen Gupta said in his report that it may be too risky for RBI to wait for sub-Rs50 per dollar levels. "We think the difficulty with this rupee bull scenario is that the RBI could simply end up missing the bus, like in early 2012. A sudden return to risk off will likely plunge it back to the rupee bear scenario with even lower foreign exchange reserves," said Sen Gupta.
India's foreign exchange reserves have fallen by $18 billion to $294 billion over past one year, as per data from the RBI.
