The Reserve Bank of India’s (RBI) measures to attract foreign currency inflows have delivered stronger-than-expected results, mobilising $136 billion. But with the impact on the rupee modest so far, market attention is now shifting to how the central bank manages the currency amid a large forward position and persistent global risks.
Market participants expect the rupee to remain range-bound, with the RBI likely to intervene on both sides to prevent sharp appreciation or depreciation.
The central bank announced swap facilities for Foreign Currency Non-Resident (Bank), external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs) on June 5 to support the currency and bridge the balance-of-payments gap. Since then, the rupee has appreciated 1.36% from 95.79 to close at 94.49 against the dollar on Friday. It had touched a record low of 96.83 in May amid the West Asia crisis.
“The limited impact on the rupee reflects the fact that dollars from FCNR(B) deposits are being absorbed by the RBI rather than released into the system, while higher global yields, oil prices and lingering geopolitical uncertainty continue to weigh on the currency,” said Ritesh Bhansali, deputy CEO, Mecklai Financial Services. The broader objective was to stabilise the rupee, which has been achieved, he added.
Why the Rupee Isn’t Surging
In contrast, when the RBI deployed a similar foreign-exchange strategy during the 2013 taper tantrum, the rupee appreciated about 8% in the first three months of the scheme.
“The 2013 episode was very different, whereas today the RBI has built up reserves and appears focused on rupee stability rather than a one-off sharp appreciation. Moreover, geopolitical risks and the potential for near-term global shocks remain unpredictable,” said Dilip Parmer, research analyst, HDFC Securities.
According to the latest RBI data, banks mobilised $127 billion through FCNR(B) deposits by August 31. Total inflows, including ECBs and OFCBs, stood at $136 billion.
The stronger inflows have given the RBI greater firepower to stabilise the rupee and intervene on either side of the market, participants said. The central bank’s foreign-exchange reserves rose to a record $740.80 billion as of August 28.
“From an RBI intervention perspective, the strategy therefore appears to have evolved from simply defending the rupee during periods of weakness to actively managing the distribution of FX flows across the spot, forward and liquidity markets,” said Kunal Sodhani, treasury head, Shinhan Bank.
$160 Billion
“With its forward short position near $137 billion, the RBI may go for a two-way management while using dollar supply to buy on deeper dips, rebuild reserves and manage forward-book exposure,” he added.
The large forward position, however, could constrain the RBI’s room for manoeuvre.
“By end-August, the RBI’s short forward book is likely to be around $160 billion, leaving net reserves at roughly $600 billion after accounting for the $740 billion headline reserve figure — a position that is not very comfortable. This elevated forward exposure is expected to remain a medium-term drag on the rupee,” Bhansali said.
The RBI has also been selling dollars in recent weeks to contain excessive pressure on the currency and keep it within a range.
Madhavankutty G, chief economist, Canara Bank, said the geopolitical environment remains fragile, with higher oil prices and a strengthening dollar imparting a modest depreciation bias to the rupee.
“However, aided by the recent inflows, the currency may see only an orderly depreciation of around 2% over the year,” he said. He expects the rupee to trade in the 94.75–95 range by December.
Bhansali expects the rupee to move within a roughly Re 1 range in the near term, while Sodhani sees it trading between 93.50 and 95.80.