Informist, Monday, Oct 10, 2022
By Richard Fargose and Pratiksha
NEW DELHI/MUMBAI – After seeing a controlled depreciation for a considerable period, the rupee’s movement finally seems to be in line with external factors, as the Reserve Bank of India appears to be letting go of its strong shield.
The rupee breached yet another psychologically-crucial level of 82-per-dollar on Friday and fell to a record low of 82.6775 a dollar today, within just 12 trading days of closing below 80 per dollar for the first time. Today, the rupee settled at 82.32 a dollar.
Interestingly, this unprecedented fall in the rupee comes after the Indian unit took 55 trading days to move from the 79-mark to 80 per dollar, mainly due to active intervention in the market by the RBI.
The Indian unit weakened sharply after a median of projections by US Federal Reserve officials showed Fed rates peaking at 4.50-4.75% next year, with no cuts until 2024.
According to market participants, the sharp depreciation in the domestic currency can also be attributed to lack of aggressive intervention on behalf of the RBI.
Hawkish Fed rate hike projections came as surprise to financial markets worldwide, and the RBI too. Now, the market is factoring in an extended period of higher US yields and dollar strength than expected earlier.
Analysts are of the view that as the RBI’s forex reserves have depleted by over $100 bln from their peak and the import cover is down to just nine months, the level of intervention from the RBI seen in the past few months isn’t sustainable.
“Till now, the rupee’s outperformance against EM (emerging market) was like the one-eyed man king in the land of the blind as the RBI created downward pressure on USDINR via selling borrowed USD reserves. But it had to come to a pause someday,” said Amit Pabari, managing director of CR Forex Advisors.
The rupee has fallen over 3% since the FOMC outcome on Sep 21, while peer emerging market currencies fell in the range of 0.5-2.5% during the same period.
Analysts say RBI Governor Shaktikanta Das’ comments after the RBI’s policy outcome on Sep 30 had indirectly hinted that the central bank was not targeting any particular level, and would be okay if the external environment demanded further depreciation.
In earlier public appearances, Das and other RBI officials have said the central bank won’t allow “runaway depreciation” in the rupee, but a similar assurance was missing during the post-policy press conference in September.
“Rupee is a free-floating currency and is market-determined, and RBI does not have any fixed exchange rate in mind,” Das had said at the post-policy press conference.
Market participants said Das’ comments need be to seen differently, after the market turned complacent of sorts with 80.00 a dollar being defended for almost two months.
“It is not that RBI has said these words for the first time but reiterating in a monetary policy discussion/interview, in my view, is to impress upon the point that RBI would not intervene aggressively going forward, except for period of any disorderly move, and may allow it to drift either way, if market forces warrant,” Vikas Bajaj, head of currency derivatives at Kotak Securities, said in a note.
“In a nutshell, with RBI keeping soft hands and offshore points driving the market, the rupee can remain under pressure. We might see higher gap up/down risk, plus outsized moves, often.”
FEAR FACTOR
Analysts say that with the US central bank expected to continue hiking policy rates to contain raging inflation, the odds against the Indian unit are stacking up.
The rupee may also feel the heat from prices of crude oil. After easing to $84 per barrel last month, prices are again rising towards the $100-per-bbl mark after the Organization of the Petroleum Exporting Countries and its allies on Oct 5 agreed to cut production by 2 mln bbl per day.
India is the third-largest oil importer in the world, and higher prices of the commodity weigh heavily on the Indian rupee.
“I think there are no positive factors to support rupee as of now. Although there are indications on the domestic side that the growth has improved, the global cues are more than offsetting it,” said Shashank Mendiratta, economist with IBM India. “Particularly, in the past couple of weeks, we were thinking that the height of commodity price boom has softened now, but with the OPEC coming up and suggesting cut in production, that is an additional negative factor for the rupee.”
Currency market players are also expected to remain wary about depreciation in the Chinese yuan, which fell to a record low against the dollar in September, as this weighs on other Asian currencies such as the Indian rupee due to weakening export competitiveness.
Market participants say that even the imminent positivity attached to rupee has now faded after JPMorgan did not include India’s sovereign bonds in its bond index for emerging market economies in the latest review. They are of the opinion that foreign institutional investors may turn net sellers in the near term amid fears of a global economic recession, policy tightening by the Fed, and high crude oil prices, which may in turn put pressure on the local currency.
WHAT NEXT?
Keeping in mind the less aggressive dollar sale interventions by the RBI during the past few sessions, and the rupee’s rapid fall from 80 a dollar to 82 a dollar, market participants are now betting that going ahead, the central bank may remain prudent with its intervention strategy.
“Considering the pace of depletion in FX reserves, the RBI doesn’t have that level of ammunition it had six months back,” said Anil Kumar Bhansali, head of treasury, Finrex Treasury Advisors LLP. “So, it makes sense for the RBI to ease the market intervention and in any case, they have said that they do not want to change the direction.”
In just 12 months, the RBI’s foreign exchange reserves have declined 16% from their peak level to $532.66 bln as on Sep 30.
According to the median of the estimates of 10 respondents in a snap poll, the rupee is seen settling at 83.05 per dollar by the year-end. Some even see it touching a low of 85/$1.
Analysts say that through the current spell of sharp depreciation, the RBI is giving market forces the space to adjust the exchange rate to reality.
POLL DETAILS:
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Edited by Avishek Dutta
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