Hopes dim for rebound by rupee

MUMBAI: Bets on the Indian rupee’s rebound this year are already facing headwinds.

The Reserve Bank of India (RBI) signalled recently that it won’t relent on the dollar purchases that pushed the currency to the bottom of Asia’s currency rankings in 2020.

Analysts had been forecasting a rise for the rupee for the first time in four years on hopes the RBI may slow its foreign-currency accumulation after the stockpile rose to a record.

The RBI’s comments suggest “the large FX intervention that the central bank undertook in 2020 totalling almost $120 billion will continue in 2021”, said Khoon Goh, head of research at ANZ Banking Group in Singapore. “Persistent FX intervention will see INR underperforming regional currencies.”

RBI Governor Shaktikanta Das said on Jan 16 that emerging markets need to build reserves as buffers against external shocks, even at the risk of being added to the US watchlist for currency manipulation. India rejoined the list in December due to RBI’s sustained forex purchases and a large goods trade surplus with the US.

Indian central bank officials are usually reticent about commenting on the nation’s foreign exchange policy. This marks a departure from a 15-year stance of intervening only to contain volatility, said Bank of America economists.

The median estimate of a Bloomberg survey shows the rupee may strengthen rise to 72.40 to a dollar by year-end. It’s risen 0.1% so far in 2021 to 72.9775 after three straight years of declines. Goldman Sachs sees it appreciating to 70 by March 2022.

The rupee is under pressure to rise on heavy foreign inflows. However, that prompts the central bank to mop up excess dollars with the aim of keeping the exchange rate stable. Deutsche Bank expects inflows to reach $82 billion by the end of the fiscal year on March 31, and to rise at a similar pace for the following 12 months.

The RBI bought a net $10.3 billion of foreign exchange in the spot market in November while its long-dollar position more than doubled from a month earlier to $28.3 billion, central bank data showed.

India’s forex reserves consequently rose to a record $586 billion, catching up with Russia, which has the world’s fourthlargest stockpile. Mizuho Bank sees this having a positive implications for the rupee when the greenback strengthens.