InvestorQ : What does the RBI governor mean when he mentioned that the RBI would be anchoring rupee fall expectations?
sara Kunju made post

What does the RBI governor mean when he mentioned that the RBI would be anchoring rupee fall expectations?

Mary Joseph answered.
4 weeks ago

If you though that the RBI only manages inflation expectations, think again. It is also managing expectations of depreciation in the rupee. The reasons are not far to seek. Rupee is close to 80/$ and the dollar index or the DXY is at a 20-year high and well above the 110 levels. This makes the rupee vulnerable to sudden spikes in volatility. RBI interventions can defend the rupee but they come at a cost since it depletes forex reserves. India’s forex reserves have already fallen from $647 billion to $561 billion this year due to interventions.

Now Shaktikanta Das has provided a new perspective. According to Das, the RBI is working on currency intervention with 2 goals in mind. The first is to prevent excess volatility in exchange rates. Now the RBI has also added a second principle to its forex interventions. While preventing excess volatility will remain the basic goal of the RBI, the other goal of the RBI will also be to anchor expectations around the depreciation of the rupee. Like equities, currencies also have a psychological side to it and that is what the RBI wants to manage.

In 2022 so far, the Indian rupee has depreciated 6.9%, which is not too bad considering the Dollar Index (DXY) has appreciated 11%. RBI governor has justified the interventions on the grounds that the signals given were instrumental in preventing free fall of the Rupee. It is similar to managing inflation expectations. Once the people are convinced that inflation will be brought down by the RBI, their expectations of inflation come down and that eventually tweaks inflation lower. Same happens to the rupee fall expectations also.

Das has rightly pointed out that defending the rupee at critical levels, reduces the fall expectations and that avoids too much of speculation on the Indian rupee. In Dubai and Singapore, there is a strong offshore rupee market where the rupee is traded via non-deliverable forwards (NDF). Once the RBI sends a signal that it is anchoring the rupee depreciation expectations, it cuts down speculation against the rupee. It is not just the actual intervention, but also the perception that RBI will intervene, that matters.