India’s central bank is set to sell a sixth of its foreign exchange reserves to protect the rapidly falling rupee after the currency plummeted to record lows in recent weeks, a senior source with knowledge of the matter said. think of the central bank told Reuters.
The rupees has lost more than 7% of its value in 2022 and weakened past the psychological 80 per US dollar on Tuesday, but the source said the drop would be much larger if the Reserve Bank of India (RBI) does not intervene to prevent deterioration.
The RBITheir currency reserves have fallen by more than $60 billion from their peak of $642.450 billion in early September, partly due to a change in valuation, but largely due to USD selling intervention.
Despite the drop, the RBI’s $580 billion in reserves remains the fifth-largest in the world, giving the central bank confidence in its ability to avert any unusual, sharp decline.
“They have shown that they will use the reserve at will to stem the volatility of the rupee. They have the potential to be lethal and have demonstrated a willingness to use it,” the source said.
“RBI can spend another $100 billion if needed to protect the rupee,” the source added.
The source said the RBI, in its stated stance, is not trying to defend the rupee or keep it at a certain level but will act to avoid any devaluation of the currency.
The RBI did not immediately respond to a query seeking comment.
The decline in the rupee is in line with what is happening globally – a widespread and persistent rally in the US dollar as a result of the Federal Reserve’s aggressive monetary tightening and as a result investors Investors scramble to sell riskier assets in favor of dollars.
India’s current account and trade deficit looks set to widen further as the Russia-Ukraine conflict has resulted in a spike in commodity prices, especially oil, which accounts for a large portion of India’s import bill. Degree.
“There is no doubt much of the rupee’s decline is related to the strength of the US dollar and higher oil prices, but the RBI has also gone behind the curve even though inflation remains above its midpoint target in the near term.” three years now and growth momentum is still strong,” said. Charu Chanana, a market strategist at Saxo Capital Markets.
“India’s macro fundamentals remain strong and that means the trend could reverse as the dollar peaks.”
Foreign investors have sold nearly $30 billion in shares so far in 2022 while the monthly trade deficit has averaged $25 billion since January, suggesting a $100 billion intervention cat. dollars to directly cover the demand for dollars will only last four months.
WORSE YET TO
Most analysts and traders believe the worst is yet to come for the rupee, although the RBI intends to defend the currency and sound Indian macroeconomic fundamentals.
“It is highly unlikely that foreign investors will return to India in a hurry, given the global scenario of rate hikes and quantitative tightening,” said a senior trader based in Singapore. said.
“We’re just starting to absorb dollar liquidity.”
After a series of government and central bank measures, authorities expect foreign investors to return to the market within a month, but investors remain cautious.
“Quantitative tightening has only just begun in the US, which means the dollar will go out of India. I will enter into a long dollar trade. Rupee must exceed its fair value. We could easily go to 84-85 before the market turns.” said a second trader.
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