Reserve Bank of India (RBI) governor Shaktikanta Das on Friday said the central bank had no particular level of the rupee in mind, but had zero tolerance for volatile and bumpy movements.
Das said the rupee was holding up well relative to both advanced and emerging market peers, adding that the foreign exchange reserves were adequate. The central bank, the governor said, has been supplying US dollars to the market to ensure there was adequate forex liquidity, the very purpose for which reserves had been accumulated. “And, may I add, you buy an umbrella to use it when it rains!” the governor said.
Addressing a banking conclave organised by Bank of Baroda, Das said a very small portion of the external commercial borrowing (ECB) exposures of Indian entities are unhedged, adding that there is little need for concern about the impact of a depreciating currency on local entities.
Citing data from the June 2022 financial stability report (FSR), Das said that of the outstanding ECBs of $180 billion, 44% or $79 billion is unhedged. This includes about $40-billion liabilities of public sector companies – mainly in the petroleum, railways and power sectors – which have assets with a natural hedge character.
“Besides, being public sector entities, their foreign exchange risk – if any – can be absorbed by the government. Such a contingency is unlikely to arise,” Das said.
The remaining $39 billion of ECBs represent 22% of the total ECBs outstanding and include borrowings of those companies which have a natural hedge in the form of earnings in foreign currencies. “This would leave a very small portion of the total outstanding ECBs that are truly unhedged,” Das said.
The governor said that for India, the RBI’s internal research estimates the optimal hedging ratio at 63%. The optimal hedge ratio calculates the proportion of hedging that minimises the variance of the portfolio. “Taking into account natural hedges and the exposure of public sector companies, the optimal hedge ratio condition is comfortably satisfied in the case of the stock of ECBs in India’s external debt,” Das said.
A strong depreciating trend in the rupee has led to concerns over the unhedged foreign currency borrowings of Indian entities. Das reiterated the RBI’s commitment to supporting the rupee, which recently touched the 80-mark against the dollar. The central bank’s interventions in the currency market have helped cushion the rupee’s fall.
“Due to the RBI actions, including measures to encourage inflows, the movements of the rupee have been relatively smooth and orderly. By eschewing sudden and volatile shifts, we have ensured that expectations remain anchored and the forex market functions in a stable and liquid manner,” Das said.
The RBI will continue to engage with the forex market and ensure that the rupee finds its level in line with its fundamentals. Das reiterated that the central bank has no particular level of the rupee in mind, but would like to ensure its orderly evolution. “…we have zero tolerance for volatile and bumpy movements,” he said.
While the outlook on price stability is clouded by external conditions, inflation appears to have peaked, Das said. “As it would appear, I’m reiterating, as it would appear, inflation appears to have peaked and it has moderated from 7.8% to 7.04%. Now it is at 7%. So, it is a very volatile situation,” he said.
The governor observed that commodity prices have softened in June, but are still quite high. Whether they sustain at the current levels or whether they bounce back again or ease off will depend on a number of factors. Das attributed the difficulty in assessing the future trajectory of prices to uncertainties around whether advanced economies are headed towards recession, which could result in demand compression.
“These are all uncertainties, but at the same time there’s stimulus being given by large economies. It’s an uncertain environment and we should not rush to any conclusion in such a great hurry,” he said.