Mumbai: Indian central bank 2013 playbook To protect the domestic currency from sharp fall and to rebuild foreign currency inventory Is not likely To be useful in the current crisis as the economic fundamentals are vastly different, Analysts Told.
Indiaof foreign exchange inventory That’s down by about $110 billion from a peak of $642 billion in September last year, and although this is largely due to a fall in the value of holdings in the dollar and other currencies, another important reason is central bank intervention in the money market. Is. Rupee.
The local unit fell nearly 11% against the US dollar 2013A slide that has matched so far this year, with most market participants expecting a further decline by the end of 2022.
Reserve Bank to protect the rupee India dipped in your forex inventory, The latest available data released Monday shows it has sold a total of $43.15 billion since the start of 2022, including $4.25 billion this August.
“It will be important” to rebuild FX inventory Pucca. There will be an urgent need as the fundamentals are also unfavourable,” said Madan Sabnavis, chief economist, Bank of Baroda.
The RBI, in July, announced some measures to liberalize foreign exchange flows, including giving foreign investors access to a larger share of government debt and giving banks wider opportunities to raise more deposits from non-residents. Is.
but these are the solutions not likely to prove just as effective as they had 2013,
unprofitable spread
in the back 2013The RBI had offered to swap the US dollars that banks had raised through foreign currency non-resident (FCNR) deposits or foreign currency financing for the rupee at concessional rates.
It swapped FCNR deposits with maturities of three years or more at a fixed rate of 3.5% per annum, which was about 3 percentage points lower than the market rates at the time, while it swapped foreign exchange funds at 1 percentage point below the market. Of. rates.
These two swap windows garnered approximately $34 billion in investments at a critical time, with $26 billion being invested through the FCNR route alone.
but these are the ways not likely To be fruitful as of now.
“The FCNR deposit route may not be as effective this time around, due to reasons such as narrow US-in rate spreads and less aggressive rate hikes this cycle. 2013Radhika Rao, Senior Economist, DBS Bank said.
this time, with IndiaThe 3-year bond yield is at 7.5% and the US yield is at 4.5%, with a 3% spread. not likely The current hedging cost is around 6.5%-7% to help investors make any profit on a purely hedging basis. benefits are not likely Even though RBI has offered a discount window, which it has not done yet.
“On a purely hedging basis, the same level of subsidy will not suffice. Either there will have to be a tremendous hike in domestic rates or the RBI will have to increase subsidies to make things happen. WorkVivek Kumar, senior economist at QuantEco Research, said.
import cover
To add problems, IndiaIts economic foundation has also weakened.
The current account deficit is widening and is expected to remain above 3% of GDP for the current fiscal ending March 2023.
With capital flows also volatile, economists expect the balance of payments to be negative, declining inventory ahead.
and late inventory are sufficient to cover imports for more than eight months at current levels, Analysts Says the constant shortage can cause some concern.
“If the current account deficit remains above 3% of GDP, a fall below the eight-month import cover (around $500 billion) may start attracting market attention,” said QuantEco’s Kumar.
“A panic situation prompting a coercive policy response may emerge if inventory Touch the six-month import cover, i.e. around $380 billion.
possible solutions
Analysts Said that while short-term reforms may provide intermittent relief, policymakers will have to continue to focus on strengthening the structural macro buffer.
Bank of Baroda’s Sabnavis suggests floating sovereign bonds like Resurgent India Bonds (RIB) India Millennium Deposit Bonds (IMDs) in the past to help boost foreign exchange inventory,
“Such measures can directly bring dollars in,” he said.
Sabnavis said that if the dollar continues to strengthen, the rupee may weaken to 82-83 levels in the near future and fall to 84. The local unit is currently at 82.28 per dollar.
“It is difficult to assess the level really, and depending on the response of the RBI, the expectations are favourable.” ,Reuters
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