The Reserve Bank of India's latest measures to curb dollar demand may help stabilise the rupee in the near term, but a sustained recovery will depend on an improvement in India's balance of payments, according to Sonal Varma, Managing Director and Chief Economist for India and Asia Ex-Japan at Nomura.
Speaking to NDTV Profit, Varma said the measures announced by the central bank signal its discomfort with further rupee depreciation. However, she cautioned that the interventions could slow the pace of the currency's decline without necessarily reversing the underlying trend.
The Reserve Bank of India on Friday has stepped up efforts to limit the rupee's decline, as higher oil prices and rising global bond yields add to pressure on the currency, which has lost more than 7% against the US dollar this year. Under the new measures, the RBI will meet the dollar needs of Indian Oil, Bharat Petroleum and Hindustan Petroleum through a special facility, reducing their purchases in the open market.
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It has also raised the cost of some currency hedging transactions and lowered the threshold for derivative deals that do not require proof of an underlying exposure. The measures aim to reduce market demand for dollars, discourage speculative currency positions, and bring the weighted average call rate closer to the policy repo rate.
RBI Signals Discomfort With Rupee Depreciation
Varma said the central bank had already been using foreign exchange intervention to manage pressure on the rupee. However, India's foreign exchange reserves have declined by around $43 billion since the week of Sept. 11, reflecting the scale of the pressure.
She described the latest measures as the RBI activating a second line of currency defence through tighter macroprudential measures, after its initial reliance on foreign exchange intervention.
The measures could help stabilise the spot market in the near term and support some appreciation in the rupee. Restrictions on foreign exchange derivative contracts could also reduce demand for forward cover from importers and discourage speculative positioning.
However, Varma said the measures would not address the underlying problem unless India's balance of payments improves.
Higher Oil Prices Add To Currency Pressure
Varma said damage to energy infrastructure has disrupted supplies, particularly in refined petroleum products, and normalisation of the energy supply chain could take time even if a truce is reached.
She expects oil prices to remain somewhat elevated unless there is a significant slowdown in global growth. For India, higher crude prices could add to external pressures and increase the need for further policy measures if the situation persists.
Varma said the RBI could consider swap lines to address short-term dollar shortages, while restrictions on outflows and certain imports could also form part of the policy response.
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If elevated oil prices persist, domestic fuel prices may need to adjust to reflect higher import costs, allowing consumers to share some of the burden.
In the medium term, she said, India needs to strengthen its external position through export promotion, import substitution, and higher foreign direct investment and other capital inflows.
Varma said the effectiveness of the RBI's measures would ultimately depend on global developments, including oil prices and capital flows. The interventions could slow the rupee's depreciation, but a lasting reversal would require an improvement in the balance of payments.
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