RBI's Rs 34 Lakh Crore Firepower May Arrest Rupee's 'Panic' Tumble Over Coronavirus

The Reserve Bank of India (RBI) kept amassing dollars all through 2019, ending the year with Asia's biggest jump in foreign-exchange reserves. That may come in handy now.

Authorities may deploy some of the stockpile to steady the rupee, which has tumbled more than 2 per cent over the past week as more locals are diagnosed with the coronavirus. The currency is the worst performer in Asia this month after having escaped relatively unscathed in February when most regional peers were hit by the contagion.

"The RBI has big firepower at its disposal in the form of FX reserves and can easily arrest the rupee's losses," said Sajal Gupta, head of foreign exchange at Edelweiss Securities Ltd. in Mumbai. "What we are seeing is a panic rupee reaction."

India's foreign-exchange reserves rose by $64 billion in 2019 and the central bank added another $18 billion in 2020, taking holdings to a record $476 billion as of February 21, according to data compiled by Bloomberg. China added $35 billion last year, while reserves rose by $8.5 billion in Indonesia and $2.2 billion in Malaysia.

State-run lenders sold dollars on behalf of the central bank Wednesday, according to two Mumbai-based traders who didn't want to be identified. The rupee ended the day 0.1 per cent stronger.

Citibank on Wednesday said the rupee appeared to have over-reacted to confirmation of the new virus cases and it recommends buying bullish rupee exposure via options. India's link to the global supply chain is limited and the current-account deficit may narrow due to the virus' impact on economic activity and lower commodity prices, strategist Gaurav Garg wrote in a note.