Indian Rupee Value Supported by RBI Intervention, but further Losses still Expected
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- The Rupee was supported up by India's reserve bank on Friday
- Rumours of intervention stopped a rout at 72 to the Dollar
- Yet further weakness may be on the cards eventually
Asian currency markets witnessed the long arm of the Reserve Bank of India (RBI) come to the aid of its falling currency on Friday, September 07, after the Rupee took another plunge to 72 versus the Dollar reports suggest.
"The Reserve Bank of India intervened heavily in the foreign exchange market on Friday, mounting a formidable defence of the 72 rupee to the dollar mark in a reversal of its light-handed approach in the last few weeks, dealers said," says Suvashree Choudhury, a reporter for Thomson Reuters news.
The intervention comes after an extended run of weakness for the currency which has seen USD/INR go from 68.25 Rupees to the Dollar on August 1 to 72.00 on September 7.
GBP/INR, meanwhile has fallen from an August low of 88.00 to Friday's spot price highs of 93.38.
The decline was caused by multiple factors including concerns about the stability of emerging market economies with twin deficits, crises in both Turkey and Argentinian; a stronger Dollar, escalating trade wars and a dramatic rise in political risk from the worldwide spread of populism.
India had actually been considered one of the strongest of the EM countries hit buy the EM sell-off after it registered 8.2% GDPgrowth in Q2 - the fastest rate in the world.
Yet a laid-back central bank which viewed its currency as undervalued and was not interested in defending it, led to more loses until the intervention news on Friday.
"Traders said the RBI has likely been selling dollars through both private and state-run banks on the anonymous forex trading platform throughout on Friday, underscoring its intent to staunch losses in the rupee," says Choudhury.
A lack of a radical change in the RBI's FX reserves, indicates, however, that intervention may have been more muted than thought.
Foreign exchange reserve data out on Friday for the week ending August 31 showed only a 1bn fall from 401 to 400bn, which indicates intervention in late August was limited, although we still don't have the data for the first week of September when it might have increased.
A dealer at a state-run bank interviewed by Reuters said he expected the RBI to pick its moments for intervening carefully, selecting days when the Dollar was relatively weak, so as to get the most benefit.
Some economists remained remarkably sanguine about the intervention rumours.
"We doubt that today’s action signals a wholesale change of course," says Shilan Shah, senior India economist, at Capital Economics. "A weaker rupee should not be a major concern for policymakers. While the dollar cross gives an impression of exceptional weakness, in trade-weighted terms, the rupee actually started the year close to a five-year high and is not obviously weak today. India’s foreign debt is low."
India has less contagion risk compared to other Emerging Market countries that are currently suffering a currency crisis because its reserves can cover almost all (circa 80% ) of its outstanding external debt and thus can be mobilised to protect the economy.
Yet despite being upbeat about the economy Capital's Shah expects further weakness for the Rupee.
"We still expect the rupee to end 2019 weaker than today, at 75," says the economist."Senior officials say they would even be comfortable with the rupee at 80."
Shah speculates that the RBI intervened because of the recent "abrupt" moves which has seen INR fall 3% against the Dollar in only the last couple of weeks.
"In other words, the RBI isn’t drawing a line in the sand, just throwing sand into the gears," says the economist.