InvestorQ : Which way do you see the rupee moving against the dollar in next few weeks? What are the options for the RBI?
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Which way do you see the rupee moving against the dollar in next few weeks? What are the options for the RBI?

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Rashi Mehra answered.
3 weeks ago
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Let me first dwell upon why the level of 80/$ is so important for the Indian rupee. Since 2007, INR weakened from 40/$ to 80/$; or around 4.5% annually. That is nearly equal to the inflation differential. Secondly, at 80/$, the stock markets maintained dollar returns of -20%. Any sharp rise beyond the 80/$ levels would tip Indian stock markets into bear mode. FPI selling has been subdued in last few days due to RBI support at 80/$ levels. INR beyond 80/$ would mean a sharpening of the sell-off by foreign portfolio investors in Indian equities.

But, how long can RBI intervene. It did intervene at 78/$ and again at 80/$. RBI has now confirmed that it would commit around one-sixth of its reserves or around $110 billion ot defend the rupee. However, it has already sunk $60 billion so far and so it would have further leeway of around $45-50 billion only. However, today RBI intervention is not just about selling dollars in spot market. It also covers intervention in the non-deliverable forward (NDF) market, bank dollar forward market and also the USDINR ETD market.

A good choice now would for the RBI to action its back-up plan. In 2013, RBI went out of the way to attract dollars into India, which helped the INR recover. Whether RBI wants to make the flow of FPI equity, FPI debt or NRI deposits easier and more lucrative is a situation specific decision. There is a limit to intervention, especially with the technical pressure on the rupee. The sooner the RBI comes in to fundamentally soothe frayed nerves, the better it is going to be!

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