Best rupee rally in a year boosts RBI’s war chest
mumbai — The rupee’s sharpest rally in almost a year is giving India’s central bank scope to take out an insurance policy for what could be a tumultuous 2017.
A resumption of stock and bond inflows and a budget viewed as fiscally prudent and pro-growth spurred a 1.9 per cent gain against the dollar in the last three weeks, the best performance in Asia. The Reserve Bank of India is responding by buying dollars to bolster its foreign-exchange reserves. It added $1.6 billion to its stockpile in the week through February 3, the most since early September.
One of the world’s fastest growth rates, slowing inflation and a domestic market of 1.3 billion people has made India an attractive hedge against a possible rise in trade protectionism after President Donald Trump’s surprise US election win. Still, the Asian nation wouldn’t be immune to an external shock that causes investors to sour on developing-nation assets.
“These rupee levels provide a great opportunity to buy dollars and build reserves just in case depreciating rupee pressures return,” said Viraj Patel, a foreign-exchange strategist at ING Groep in London. “In a year when globalisation and free trade will come under intense scrutiny,” India’s focus on tackling domestic problems rather than chasing export-led growth should prove beneficial, he said.
The rupee has declined 0.1 per cent this week to 66.97 a dollar as of 9:13am in Mumbai. The currency’s three-week rally was the biggest increase over such a period since March 11, 2016.
The RBI is unlikely to tolerate the rupee gaining beyond 66.5 a dollar, said Patel, adding that he expected dollar strength to return with “a vengeance” in the next few weeks. The currency would probably weaken toward 68.5 this quarter and then rebound to settle between 66 and 67, he said.
Alpana Killawala, a Mumbaibased spokeswoman for the RBI, didn’t immediately respond to an e-mail seeking comments.
India’s foreign-exchange reserves
These rupee levels provide a great opportunity to buy dollars and build reserves Viraj Patel, Forex strategist at ING Groep
increased 0.4 per cent to $363 billion in the week through February 3, according to data released on Friday. That was the fourth weekly advance in a row, the longest such run since August.
Based on the International Monetary Fund’s methodology for calculating reserves adequacy for emerging-market economies, a range of $215 to $325 billion is enough for India, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore.
“India’s level of forex reserves is more than adequate at present,” he said. Although, “you definitely want to rebuild when times are good and you have inflows coming in, and not be afraid to use them when you have extreme volatility on the other side.” — Bloomberg