The Reserve Bank of India (RBI) measures to boost foreign exchange inflows may not lead to a huge influx of foreign capital into the country and there is unlikely to be a telling upward impact on the exchange rate, experts and economists said.
“We have seen such ad-hoc measures in past episodes of rupee depreciation as well with little impact,” said Vikas Bajaj, head of currency derivatives at Kotak Securities. “We have to accept the fact that the rupee is facing problems on both the current (rising trade deficit) and capital account (outflows) side in a backdrop where the external environment for the dollar is quite supportive and financial conditions are getting tighter.”
When the external environment is hostile, Bajaj said, the RBI’s measures might have a salutary effect on the rupee in the short term. However, they may not change the broad direction of the rupee, which depreciated beyond 80 to a dollar on July 19.
The RBI announced a series of measures earlier this month to boost forex inflows and alleviate pressure on the rupee’s exchange rate. These included greater freedom to banks to raise foreign currency deposits from non-residents and lifting of a cap on foreign portfolio investors’ short-term investments in government and corporate debt.
The central bank’s decisions come in the wake of the rupee hitting successive record lows over the past few sessions. The rupee hit a record low of 79.36 per dollar on July 5. The Indian currency has weakened by 4.5 per cent against the dollar so far in FY23 amid global recession risks, high risk aversion, and large policy spill-overs.
All this while, the RBI has looked to use its foreign exchange reserves – which it said were “adequate” – to prevent exchange rate volatility. Traders estimate the RBI sold $30-40 billion in the spot and forward markets over the past six weeks.
The RBI’s forex reserves stood at $593.32 billion on June 24, down from $632.95 billion on February 18. Additionally, the central bank’s forward book was net long $63.83 billion as of April 30, providing even more buffer.
More than adding to the substantial FX reserves, market participants see the RBI’s measures as a signal of its intent to end the rupee’s runaway depreciation and preserve foreign exchange reserves. Moreover, the central bank is seen wanting to prevent speculative attacks on the rupee and provide directional signals. The steps could also help address the current dollar shortage in the spot market to some extent, they said.
