Outlook: RBI moves quickly to stabilize FX rate, but these moves may help rupee more – CNBCTV18 | Omd Cialis

Through CNBCTV18.com contributor Is updated)


RBI’s moves so far are mostly tactical moves to deal with dollar outflows for the next 4-5 months. Continued dollar outflows and RBI intervention point to clear dollar tightness in the spot market, which the central bank is trying to counter by offering short-term stimulus to FPIs.

The Reserve Bank of India (RBI) announced a series of measures to boost foreign exchange inflows into the country. India’s foreign exchange reserves have shrunk in recent months due to higher import costs, particularly of crude oil, coupled with a sell-off in equity markets by foreign investors. This has put a lot of pressure on the rupee, which has hit a new low against the dollar. The measures taken by the RBI are intended to remedy this and make India attractive to foreign investors, in particular Foreign Portfolio Investors (FPIs). The coming days will show how well they work. The measures can be roughly divided into low, medium and high impact.

Low to medium impact

  • Increase in limits for foreign borrowers: As this exemption is only available until December 31, 2022, investment grade companies will benefit in the near term as they will be able to borrow in dollars for expansion and other process improvement activities.
  • Higher interest rates for NRI deposits: This easing of higher interest rates is only available until October 31, 2022, so this measure can help in the short-term by increasing foreign currency deposits. However, given the rising interest rate regime around the world, NRIs may prefer to remain invested in foreign assets, particularly given the exchange rate risk. With the US Federal Reserve also raising Treasury bill yields, it remains to be seen whether NRIs will choose India as an investment destination over investing in US T-bills.
  • Exceptions to CRR and LSR for incremental NRI deposits: This means that banks are not required to set aside a certain percentage of the additional funds remitted by NRIs as liquid reserves. This will allow banks to do more business and save on funding costs, allowing them to pass on the benefits of higher interest rates on deposits to customers. However, if there is a US Treasury rate hike, FPIs could start withdrawing more funds from the Indian market. Since none of these incremental funds invest in safe and liquid assets, banks could face a mild stress scenario when it comes to servicing deposit withdrawals.
  • High impact

  • FPI Investing in Debt: Of all the measures announced by the RBI, those for FPI investments in debt would have perhaps the greatest impact in stabilizing foreign investment in India’s debt market. The inclusion of G-Sec with additional maturities (7-year and 14-year) and the easing of short-term investment limits in G-Sec and corporate bonds will improve the Treasury yield curve and liquidity in the market, thereby allowing more dollar inflows. Additionally, the ability for FPIs to invest in corporate CPs will help diversify their short-term lending.
  • Settlement of international transactions in Indian rupees: This is a major reform and has the potential to halt the devaluation of the rupee in the long term as the country’s demand for US dollars would fall. However, this reform could be more attractive for trade with countries like Russia and Iran, which face US sanctions.
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    RBI’s moves so far are mostly tactical moves to deal with dollar outflows for the next 4-5 months. Continued dollar outflows and RBI intervention point to clear dollar tightness in the spot market, which the central bank is trying to counter by offering short-term stimulus to FPIs. The current global situation has prompted a flight to safety, which is hugely favorable to the dollar. Most currencies, including the euro and sterling, have been under the same pressure as developing world currencies. The Indian rupee has actually held up well compared to many others. Although it depreciated by 5 percent in FY2022, it still fares better than many other developed market currencies such as the euro and sterling, which fell more than 10 percent against the dollar in FY2022.

    The RBI acted quickly to stabilize our exchange rate and reduce volatility in the FX market. However, with the currency depreciation being driven by global factors (such as the Russia-Ukraine war and fears of a global recession) rather than domestic weakness, the Indian central bank should consider some other tactical and strategic moves to mitigate them complement has already been announced.

    Tactically, the RBI could continue to intervene in the overseas non-deliverable futures (NDF) market, which would allow 24/7 trading in the rupee and allow overseas affiliates of Indian banks to continue participating in the offshore rupee derivatives market to avoid volatility to stabilize in the foreign exchange market.

    Some of the strategic actions that the government and the RBI should consider for the long-term stability of the rupee include the following:

  • Allows G-Secs to be included in global indices to improve liquidity of G-Secs and dollar inflows
  • Encourage Indian companies to issue foreign currency convertible bonds (FCCBs) and focus on improving the corporate bond market in India (a liquid CDS curve for any Indian company will give foreign investors much-needed confidence) .
  • Strategic partnerships with oil-exploring countries settled in Indian rupees. Additional steps such as tiered payments for commodity imports and prepayment contracts (when macroeconomic conditions are favourable) may be explored
  • Build infrastructure and promote the use of electric vehicles to reduce dependency on oil imports
  • Easing (with caution) restrictions on current account and capital account fundability to allow free movement of rupees and other foreign currencies
  • Improving policies to finance local manufacturing and export of goods
  • Encouraging global corporations to build and expand workforces in India by offering them tax incentives and relaxing land acquisition rules
  • These measures would not only help attract more long-term foreign currency investment, but also help improve the country’s per capita income. The RBI has many options – it must choose and implement whenever it sees the time.

    —The author, Subrahmanyam Oruganti, is Financial Services Partner, EY. The views expressed are personal

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