RBI to defend rupee against speculators

The Reserve Bank of India (RBI) is once again seeking to defend its currency when the US Federal Reserve is tightening.

This time though, analysts expect it to mount a more limited defence, aimed at fending off the worst of speculative attacks rather than holding down a line in the sand when capital flows are shifting globally with the Fed set to hike throughout the year.

“The RBI will be careful to fight cavalier speculators, and not the Fed,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “That is to say, prudence warns against trying to defy broad-based dollar trends. Afterall, a $600 billion plus reserve coffer is harder to build than it is to burn.”

Such a strategy may entail the RBI doing just limited intervention as it seeks to preserve ammunition amid a broad dollar rally fueled by expectations of aggressive monetary tightening by the Federal Reserve. The RBI’s stated objective remains to curb excessive currency volatility and in recent weeks reserves have fallen, indicating market intervention, according to analysts.

The rupee slid to a record low of 77.53 per dollar on Monday as the greenback continued its rise amid elevated crude prices, which is threatening to widen the trade deficit to unprecedented levels. Foreign funds have been pulling out of the nation’s equities at a record pace and a central bank that held back on policy tightening till last week hasn’t helped matters.

Yet, the rupee’s moves have been orderly over the past month when compared to its emerging Asian peers. The currency is down nearly four per cent this year and is in the middle of the Asian pack.

India’s central bank is intervening in all foreignexchange markets including the offshore markets, Bloomberg News reported on Monday.

The nation’s forex reserves stood at $598 billion, latest data showed. While that is down seven per cent from a record high of over $640 billion in September due to a mix of intervention and valuation changes, it still fares well on key metrics, including import coverage and short-term debt obligation, said DBS Bank senior economist, Radhika Rao.