India’s central bank ready to spend $100 billion more to defend the rupee

MUMBAI/NEW DELHI: India’s central bank is ready to sell off a sixth of its foreign exchange reserves to defend the rupiah against rapid depreciation after hitting record highs in recent weeks, a source briefed on the thought told Reuters. central bank.

The rupee lost more than 7% of its value in 2022 and weakened beyond the psychological level of 80 to the US dollar on Tuesday, but the source said the fall would have been much bigger if the Reserve Bank of India (RBI) did not intervene. to stem the decline.

The RBI’s foreign exchange reserves fell by more than $60 billion from their peak of $642.450 billion in early September, partly due to valuation changes but largely due to the selling intervention of dollars.

Despite the levy, the RBI’s reserves of $580 billion remain the fifth largest in the world, giving the central bank confidence in its ability to prevent any sharp and jerky depreciation of the currency.

“They have shown that they will use the reserves at will to avoid rupee volatility. They have the means and have demonstrated the will to use them,” the source said.

“The RBI can afford to spend even $100 billion more if needed to defend the rupee,” the source added.

The source said that the RBI, in line with its stated position, is not trying to protect the rupiah or keep it at a certain level but will act to avoid any rampant depreciation of the currency.

The RBI did not immediately respond to a request for comment.

The rupiah’s fall is in line with what is happening around the world – a broad and persistent rally in the US dollar

driven by aggressive monetary tightening by the Federal Reserve and the resulting scramble for investors to dump riskier assets in favor of the dollar.

India’s trade and current account deficits are also expected to widen further as the Russia-Ukraine conflict has led to soaring commodity prices, especially oil, which forms a large part of India’s import bill. India.

“There is no doubt that much of the Rupee’s decline is tied to US Dollar strength and rising oil prices, but the RBI has also lagged the curve despite holding steady. inflation above the median target for nearly three years now and continued strong growth momentum,” said Charu Chanana, market strategist at Saxo Capital Markets.

“India’s macro fundamentals remain strong and that means this trend could reverse when the dollar peaks.”

Foreign investors have sold nearly $30 billion worth of stocks so far in 2022, while the monthly trade deficit has averaged $25 billion since January, suggesting an intervention kitty of $100 billion to directly offset the demand for dollars would last just four months.

Most analysts and traders believe the worst is yet to come for the rupee, despite the RBI’s intention to defend the currency and India’s strong macro fundamentals.

“Foreign portfolio investors are very unlikely to return to India in a hurry, given the global scenario of rate hikes and quantitative tightening,” said a Singapore-based senior trader.

“We are only at the beginning of absorbing dollar liquidity.”

After a series of measures taken by the government and the central bank, the authorities hope that foreign investors will return to the market within about a month, but investors remain wary.

“Quantitative tightening has just started in the US…that would mean the dollars would exit India. I would go long on the dollar. Rupee needs to rise above its fair value. before the market turns,” said a second trader.

Comments are closed.