Will RBI intervene to arrest overvalued Rupee\’s slide?

Will RBI intervene to arrest overvalued Rupee\’s slide?

Mumbai: The Indian Rupee is among the worst performers in Emerging Markets in the past six weeks as investors position for a flight of capital amid threats of the Federal Reserve laying down plans to taper bond purchases, but the central bank is unlikely to intervene to arrest the slide of the overvalued currency.

A slide of 3.3 percent versus the US dollar since the beginning of December has raised fears of a quicker depreciation and an intervention by the central bank, but in the interests of remaining competitive in global markets, the currency may be allowed to depreciate, believe economists.

Rising Crude oil prices and a record current account deficit, the excess of imports over exports, in September is also playing out in the currency market as a reviving economy and global shortages are likely to put further pressure on the current account.

“High global crude oil prices, supply chain disruption and higher dollar index are responsible for recent Rupee slide against USD” said Bhaskar Panda, Executive Vice President at HDFC Bank. “We have not seen too much Central Bank action of late. The rupee will likely lose value in the middle term as it is still overvalued compared to other Asian peers.’’

This month the rupee is the second worst performing Asian currency with the local losing 1.5 per cent against the dollar. The rose marginally 0.19 per cent to 75.37 a dollar.

After a steady performance, the Rupee has begun to depreciate in recent weeks. While many expect the RBI to intervene, the central bank may not do as it looks beyond the exchange rate with the US dollar. That the Rupee has strengthened this year vis-à-vis other peers, the RBI may let it depreciate to ensure competitiveness.

\”The Rupee was relatively overvalued and volatility was close to multi year lows until a few weeks ago,\” said IFA Global, a currency advisory firm. \”The RBI therefore seems to be content seeing the overvaluation get corrected and has not intervened too aggressively by selling Dollars.\”

The Real Effective Exchange Rate of the Rupee has appreciated 1.3 percent compared with a basket of 40 currencies till September, data from the RBI shows. In the six currency REER basket it is up 1.5 percent. REER is the weighted average of a currency in relation to an index of major currencies. An increase indicates exports are getting expensive and vice versa.

India’s foreign exchange reserves at $637 billion gives the central bank the buffer to intervene to smoothen the volatility in the market whenever a global shock leads to a flight of capital.

But any depreciation because of the outflows could be temporary given that a slew of high profile Initial Public Offerings are set to hit the market in the coming months, including that of Paytm. Economists estimated that these offerings could draw as much as $30 to $40 billion of flows providing support to the currency.

\”The problem of plenty is nothing new for the central bank. The local unit is likely to depreciate but overseas inflows will likely arrest any sudden drop in the rupee\’s value negating any desperate need of currency market intervention.\” Said Madan Sabnavis, economist at CARE Ratings.

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