RBI shops for US dollars, but fails to check rise of Indian rupee

May 22 2014, 12:14 IST
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RBI must recoup $80 bn to maintain import cover, say economists RBI must recoup $80 bn to maintain import cover, say economists
SummaryRBI bought close to $7 billion worth of US dollars, in the last six weeks, the Indian rupee rose 2%...

Although the Reserve Bank of India (RBI) is understood to have bought close to $7 billion worth of US dollars (including forex swaps with oilcos), in the last six weeks, the Indian rupee rose 2% in the wake of strong foreign flows into the country’s stock and bond markets. On Wednesday, the rupee ended the trading session a shade weaker at 58.7800 compared to Tuesday’s close of 58.64.

If unchecked, the sharply strengthening rupee will hit India’s export competitiveness and, more important, the overall balance of trade. In the last 12 months, as the rupee weakened, India’s non-oil, non-gold trade balance sharply improved (see graphic).

RBI governor Raghuram Rajan is on record quoting a finance ministry study as 60-62 a dollar was a reasonable range, given the CPI inflation. “I would say that if we were at 55 it would be too strong,” he had said. While the new government, led by the BJP, is yet to articulate its views on the value of the currency, economist Arvind Panagariya, whose views are sought by the BJP, has pointed out that recouping reserves should be among the RBI’s priorities — recouping reserves would result in weakening the rupee.

The Indian currency has appreciated even as the accretion to the foreign currency reserves with the RBI continues, suggesting a more aggressive approach may be called for. The reserves now stand at $313.8 billion, up from $291.1 billion at the end of January.

Unless the RBI intervenes in the markets, the rupee could gain further given that a strong government at the Centre and hopes of an economic revival have seen foreign investors continuing to invest in the debt and equity markets. In May alone, FIIs have brought in a combined $3.7 billion, though the purchases have slowed down in the past couple of sessions. On Wednesday, the Sensex closed in the red, down 79 points at 24,298.02.

According to Bank of America-Merrill Lynch chief economist Indranil Sengupta, the RBI has added $16 billion to the forex reserves (including of FX swaps with oilcos) since March 2014. Sengupta believes the RBI will recoup forex reserves to guard against contagion, estimating the RBI will need to buy $80 billion to maintain the import cover at 7.5-8 months.

This, he believes could anchor the rupee at 58-62 to the dollar, if the dollar persists at around 1.3 to the euro, for

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