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

Mar 22 2014, 18:11 IST
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Reserve Bank of India (RBI) will likely remain hands-on in the exchange rate market. Reuters Reserve Bank of India (RBI) will likely remain hands-on in the exchange rate market. Reuters
SummaryWith the Indian rupee poised to gain further on the back of strong foreign flows, Raghuram Rajan...

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. ďIf they see large flows ahead of elections, they would be ready to mop it up,Ē Narayan observed.

ďThe RBI has always been hands-on in the exchange rate market and will likely remain so to curb volatility,Ē 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. ďThe 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,Ē 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 rupeeís 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. ďAs 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,Ē 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

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