InvestorQ : How much do you see the RBI committing to defend the rupee?
Debbie Mascarenhas made post

How much do you see the RBI committing to defend the rupee?

Arti Chavan answered.
3 weeks ago

If you want to understand RBI intervention in the forex markets, just look at how the rupee has held on under 80/$. That is the impact of the RBI intervening in the currency market by selling spot dollars to improve the supply of dollars in the spot market. However, this also means a depletion of the RBI forex reserves, to the extent the RBI sells dollars. This also leads to depletion in the forex position, as we have seen the forex chest with the RBI shrink from a high of $647 billion to $580 billion currently. What is the road ahead?

That brings us to a very basic question; how much of the reserves can or should the RBI be willing to expend to defend the value of the rupee? For now, there is no official confirmation from the RBI except for a report by Reuters. According to Reuters, RBI will be prepared to deplete about one-sixth of its foreign exchange reserves to defend the rupee against a rapid fall or up to the range of $100 to $110 billion. Since $60 billion has been nearly expended, the RBI is left with a best-case leeway of $50 billion more to defend INR.

However, there is a subtle shift that is happening. Today, the RBI does not intervene in currencies only through the dollar spot market. It partially intervenes through the non-deliverable forwards (NDF) market based in Dubai and Singapore. The RBI also intervenes by regulating the demand for dollars in the dollar forward market. To top it all, since 2013, the RBI has also been active in the listed derivatives market and has been aggressively taking positions in the currency futures and currency options market. So it is beyond spot dollar.

One common complaint from many forex watches is that the rupee has fallen anyways, despite RBI intervention. The fact is that things could have been worse had it not been for the RBI intervention. That would have resulted in a steep fall in the Indian rupee that would have been bigger and more disruptive. Even after the RBI intervention drawdown, the RBI reserves at $580 billion are the fifth-largest reserve positions in the world.

One big concern with defending the rupee is that the RBI also has a current account deficit problem to contend with The current account deficit threatens to go beyond 5% of GDP and that is hardly a comfortable situation for the RBI and the government to be in. That situation was last seen during the peak of the forex crisis in 2013.