RBI May Let Rupee Weaken In The Next 2 Quarters: Kotak Bank

The RBI may slow its intervention to protect the rupee during October-March, and allow the currency to move in alignment with global trends, Kotak Mahindra Bank said on Friday.

The rupee dropped to a record low of 81.2250 to the dollar on Friday, prompting the RBI to sell dollars to prop up the currency, traders said.

"We expect the INR to remain under pressure as markets continue to assess the extent of spill-overs from the (U.S.) Fed's hardening policy stance," Upasna Bhardwaj, senior economist at Kotak, said in a note.

For several months, the RBI has frequently stepped in to aid the rupee, as the US Federal Reserve's aggressive rate hikes dampen demand for non-dollar currencies.

In July alone, the RBI sold $19 billion dollars, according to the central bank's monthly bulletin.

Alongside its intervention in the spot market, the central bank's forward dollar holdings fell to $22 billion from $64 billion in April.

"We expect the RBI to become more prudent in 2H FY23, while intervening in the FX market," Ms Bhardwaj said.

The foreign exchange reserves have dropped to near $550 billion from a peak of almost $642 billion.

The FX buffer was sufficient to shield the economy against any major external shock, and the RBI may opt for "restricted FX intervention", Ms Bhardwaj said.

India's inclusion in the global bond indices may push the currency temporarily higher above 79 per dollar, but Bhardwaj reckons it will be temporary, as the RBI would like to rebuild the FX buffer and avert further over-valuation of the currency.

She expects rupee to trade in a 79-83 rupee per dollar band for the rest of the current fiscal year.