India is mounting an increasingly costly defense of the rupee, deploying tens of billions of dollars and resorting to extraordinary market interventions to protect a currency that has come under pressure from elevated oil prices and investor outflows. The central bank since June has already used about $90bn of the more than $140bn it raised from India’s diaspora to prop up the rupee, including through sales to the spot market and currency swaps to absorb surplus liquidity, according to two foreign-exchange bankers with knowledge of the moves. The rupee is one of Asia’s worst-performing currencies this year, having fallen 5 per cent against the dollar.
Rising crude prices from the war in Iran have driven up the cost of energy imports for one of the world’s largest oil consumers, while record foreign selling of Indian equities has exacerbated the rupee’s weakness. As the currency neared new lows this month, the RBI took unexpected steps to curb volatility. They included opening a special window to absorb state oil companies’ dollar purchases away from the spot market; cutting the threshold for rupee-linked derivative transactions without proof of underlying exposure; and requiring dealers to maintain a 20 per cent cash reserve on forward contracts with the central bank.
Those moves, which came on top of earlier measures such as curbing short positions against the rupee and courting deposits from Indians living abroad, have helped bolster the currency. The rupee has strengthened 0.7 per cent in the past week to trade at about Rs94.5 a dollar on Thursday, a six-week high. Foreign inflows to take part in the public offering of telco Jio Platforms, set to be India’s biggest-ever listing, have also helped.
But bankers and economists said the RBI could not keep spending down its foreign exchange reserves at its current pace. The central bank’s reserves have fallen by about $60bn from an early September peak of $785bn. Its net forward dollar liabilities — dollars which it will have to pay in the future — ballooned to $200bn in August from about $137bn in July, according to official data. “It is not sustainable,” said Dhiraj Nim, a Mumbai-based economist and foreign exchange strategist at ANZ Group. “FX reserves are finite and the forward book obligations are large.
The RBI will not draw down reserves to an extent that reserve adequacy becomes a concern.” Nim said the central bank was also reluctant to raise interest rates aggressively to shore up the currency because of the potential hit to economic growth. India’s year-on-year GDP growth slowed to 7.8 per cent in the quarter to the end of June from 8.6 per cent in the previous quarter. “Policy rate hikes will impact the economy more widely, explaining the RBI’s reluctance to hike aggressively,” he said. This month, the central bank raised interest rates for the first time since 2023, by a quarter point to 5.5 per cent.
The move came after India’s inflation accelerated to 5.5 per cent in September, nearing the RBI’s tolerance limit of 6 per cent. “If the currency becomes disorderly, more aggressive hikes cannot be ruled out,” said Nim, adding that the RBI seemed to have “drawn a line in the sand” at Rs97 per dollar. In an interview with local media this month, RBI governor Sanjay Malhotra reiterated the central bank’s commitment to a stable rupee and said it did not target a certain exchange rate or band. He also rejected suggestions that this month’s measures amounted to capital controls, arguing they were meant to ensure currency markets catered to genuine needs.
Source: Financial Times Markets · Summarized by HeadlinesBriefing