The Reserve Bank of India has announced measures to boost forex inflows, including liberalising limits and interest rate caps for external borrowings to encouraging debt flows and foreign currency deposits, as it aims to stem the rupee’s fall.
The Indian rupee continues to depreciate against the U.S. dollar. The domestic currency fell to a fresh record low of 79.37 against the greenback on Wednesday, before erasing some losses and closing at 79.30.
The global outlook, the RBI said, is clouded by recession risks. Consequently, high risk aversion has gripped financial markets, producing surges of volatility, selloffs of risk assets and large spillovers, including flights to safety and safe haven demand for the U.S. dollar.
As a result, emerging market economies, it said, are facing retrenchment of portfolio flows and persistent downward pressures on their currencies. India’s growth prospects, however, remain strong and resilient.
Despite headwinds from geopolitical developments, elevated crude prices and tighter external financial conditions, high-frequency indicators point to an ongoing recovery in several sectors. All capital flows, barring portfolio investments, remain stable and an adequate level of reserves provides a buffer against external shocks.
Reflecting these strong fundamentals, the rupee has depreciated 4.1% against the U.S. dollar during the current financial year so far—modest relative to other emerging market economies and even major advanced economies, the central bank said.
Will It Work?
The steps taken to boost short-end flows may not benefit right away, Anindya Banerjee, vice president (currency derivatives and interest rate derivatives) at Kotak Securities, said.
“We are unlikely to see unhedged trades on the shorter end, so the spot market will not see much benefit under current macroeconomic conditions.”
Steps taken on NRE, FCNR deposits and external commercial borrowings, he said, will certainly help, but these are steps that will support the rupee over the longer term and not immediately. “Net-net these are marginally positive moves. These very same steps could have a far bigger impact if the global situation turns for the better.”
Abhishek Goenka, chief executive officer at IFA Global, said this was the first step by the RBI, where they are trying to attract foreign flows and was reminiscent of what it did back in 2013. “We need to see how the market reacts. This move will cut long and speculative positions.”
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