InvestorQ : Do you see the RBI intervening to defend the rupee and how low could the rupee go now?
swati Bakhda made post

Do you see the RBI intervening to defend the rupee and how low could the rupee go now?

Sam Eswaran answered.
1 month ago

In fact, the RBI has been intervening in the USDINR market on a consistent basis around the critical support and resistance levels. The last the RBI did intervene was around the 78/$ mark and then again at the 79/$ mark. However, the momentum is clearly favouring the dollar and the RBI would not be keen to go overboard at a time when the rupee is still overvalued in terms of the real effective exchange rate (REER). Also, with trade deficit above $20 billion on a monthly basis, RBI wants to use a weaker rupee to boost exports.

The more practical issue for the RBI, of course, is the depleting RBI reserves. Forex reserves have already dipped from $647 billion to $590 billion and with rising imports, the import cover is already compromised. RBI really cannot afford to lose more reserves, especially at a time when the trade deficit is high and FPI flows are negative. What does that mean for the rupee levels. It may be early to say, but markets must be prepared for a new normal of 80-81/$. That would also gel with what the REER is referring and will also help exports.

In the meantime the RBI may focus more on reducing the volatility in the forex markets rather than do exchange rate management. Take a slightly longer perspective. The rupee was at around 51/$ in 2013 ahead of the currency crisis. A 60% depletion in value of rupee over 9 years is around 4-5% compounded on a per year basis. That is also the approximate inflation differential in normal times. It looks more likely that the RBI and the markets will reconcile to a range of 80-81/$. That is what the rupee appears to gravitate towards.