Indian rupee may be kept in check by Raghuram Rajans moves in forex market

Written by fe Bureau | Mumbai | Updated: Mar 22 2014, 23:41pm hrs
RBIReserve Bank of India (RBI) will likely remain hands-on in the exchange rate market. Reuters
With the Indian rupee poised to gain further on the back of strong foreign flows, Raghuram Rajan-led Reserve Bank of India (RBI) will likely remain hands-on in the exchange rate market; indeed, market watchers believe the central bank may have already started soaking up United States (US) dollars.

According to Ananth Narayan G, head of global markets at Standard Chartered Bank, although there is optimism in the market, downside risks still exist and therefore, the RBI will be very cautious. If they see large flows ahead of elections, they would be ready to mop it up, Narayan observed.

The RBI has always been hands-on in the exchange rate market and will likely remain so to curb volatility, said Ashish Parthasarthy, head of treasury at HDFC Bank.

Currency traders believe the central bank has been buying dollars intermittently in February given big foreign inflows into bonds. The RBI has been buying dollars in an attempt to sterilise dollar inflows since these have come into short-term T-bills which can easily reverse, the treasury head of a foreign bank noted.

Historically, the RBI has been hands-on and intervened in the forex market, especially at times of lumpy flows. For instance, the central bank sold $10 billion during May-October 2013 to prevent the rupees fall when FIIs were dumping rupee bonds. Later, the RBI bought $3 billion in December even as FIIs poured $1 billion into the local debt market that month. Data from the central bank showed that the RBI has sold $1.9 billion in January. As long as the central bank distinguishes between short-term hot money and long-term flows, it makes sense for them to sterilise the hot money to avoid disturbance in the market, Hitendra Dave, head of global markets at HSBC Bank, observed.

A big chunk of the dollar flows, in the last couple of months, has been channelled into the debt market given the wide interest rate differential between India and other countries. The RBI considers debt flows more volatile than equity flows. Moreover, these flows are a double-edged sword as the bulk of these have come into short-term securities.

Of the $6-billion investment, nearly $4 billion has been into treasury bills and commercial papers and FIIs have already exhausted their investment limit in these. Inflows into the equity market have been only $1.6 billion in 2014 so far in contrast to the $9 billion seen in the same period in 2013.

Barclays Capital has raised its forecast for the rupee and now expects the currency to rise to 59 a dollar by the end of March from the previous forecast of 61. On Thursday, the currency ended at 61.33/$, weaker than Wednesdays

levels. We think the recent positive INR momentum, on the back of a narrowing current account deficit, softer inflation prints, enhanced policy credibility and strong capital inflows, will continue in the near-term, Barclays noted in a report.

Hopes that the general elections will result in a stable government led by the the Bhartiya Janata Party have prompted foreign investors to pump in more than $6 billion into local debt markets. On the back of such flows, the rupee has strengthened 1.7% since January. Currency dealers believe if the hopes materialise, the rupee could gain even to 57-58/$.

The rupee has gained 12% from its all-time low of 68.85 hit in August 2014 and has become one of the best-performing currencies among emerging markets from being the worst in 2013. In September last year, the RBI opened two concessional swap windows to lure dollars, eyeing the twin benefit of improving the sentiment for the currency as well as shoring up the countrys forex reserves. The swap windows garnered $34 billion for the central bank.