The Hindu Business Line
RBI may turn to currency futures to halt rupee’s slide
India’s central bank may increasingly be turning to the currency futures market to stem a slide that sent the rupee to a record low last month, according to analysts and traders.
The Reserve Bank of India probably intervened to the tune of $2.5 billion in May – the highest for any month so far this year – and $2 billion in June, according to estimates from Kotak Securities. That compares with the $3.6 billion for the entire January-April period, according to data from the RBI.
The central bank has increased its presence on the exchange-traded futures platform as advance tax payments and people holding on to cash lead to ebbing liquidity in the banking system, analysts said.
Using the spot market to buy rupees – the conventional method to check the currency’s weakness – will only worsen the shortage.
Capital outflows, sparked by widening current account deficit and the risk-off mood that roiled emerging markets recently, have put the rupee under pressure
“Intervention in the futures market also has the best influence on offshore pricing in terms of transmission,” said Anindya Banerjee, a currency analyst at Mumbai-based Kotak. “We have seen the RBI’s intervention in currency futures going up over the past three months.”
Capital outflows, sparked by India’s widening current account deficit and the risk-off mood that roiled emerging markets recently, have put the rupee under pressure. Analysts have been paring their forecasts, and a growing number predict the currency will fall past 70 to a dollar. The rupee
hit a life-time low 69.0925 on June 28.
More gloom ahead
of The Indian rupee is likely to come under greater depreciation pressure than most regional peers, Macquarie Bank’s analysts, led by Nizam Idris, wrote in a note on Thursday. A likely increase in populist measures by the government before next year’s general elections could also worsen fiscal slippages, sending the currency to 71 by early 2019, they wrote.
Daily average turnover in currency derivatives climbed to $4.2 billion in the fiscal year that began in April, from $3 billion in the year-ago period, probably handing the RBI another reason to use the securities as a rate-management tool.
The screen-based platform also spares the central bank the need to enter into two transactions – spot and forward to offset the liquidity impact – and offers anonymity, analysts said. “There is more speculative activity in futures than in the spot market, which needs documentation for all transactions,” said Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered in Mumbai. Hence, the intervention impact could be bigger.