Prepare for Forex reserves to tumble as RBI prepares defending the rupee

Last Updated: Sat, Jul 28, 2018 12:52 hrs
US Dollars (Image Courtesy: Shutterstock)

Mumbai: Threats of a large scale trade war, rising optimism on US economy and the stronger dollar coupled with investors departing from emerging markets have lead economists and analysts to ponder on rising pressures in Asian markets.

India, one among the dominant players in Asian markets and the Reserve Bank of India, may have more to worry about in a time of rising crude prices and strengthening of the greenback.

The Rupee, which has lost almost 8% in the year up to the last week, may get to see it's Central Bank intervene in measures aimed at bolstering the Rupee. On Thursday the Rupee was trading at 68.637 per dollar and appreciated marginally on Friday.

The foreign reserves that touched a peak of $426 billion in mid-April may slide to as much as $400 billion. The RBI has already coughed about $21 billion in the past three months to keep the Forex rates under check.

Besides intervention from the RBI, Subhash Chandra Garg, the economic affairs secretary was quoted as saying last week that the government may also look at options such as launching a foreign currency non-resident type deposit collection system to keep alive sovereign bond issue. "But there's no immediate need for these," he added.

Few important observations on policy-makers' minds:

Outflows: According to a report in Bloomberg, $7 billion from Indian bonds and stocks have exited so far this year and the Reserve Bank of India has sold dollars steadily to smooth the volatility.

Rising Crude: World's fastest growing oil user is observing a 50% jump in crude prices from a year ago. This has already pushed the import bill, adding to pressure on the current account, while also worsening the inflation outlook.

Strong Consumption: Growing consumption has prompted more requirement for Dollars. Imports of electronic goods up by 20% from a year ago, besides improvement in investments have lead to a demand for more capital goods imports.

Trade wars: Trade friction between the US and China, has been reported as India's gain, however there is little to believe in this popular perception. Any friction is expected to impede global trade flow. Trade shortfall is down to a five-year high. Moreover, India's current-account deficit has widened to 2.4% of GDP in the current fiscal year ending March 2019.

Interest Rates: Rising inflation has prompted the central bank to alter interest rates first time in four years in June. Speculators are gazing at the probability of another point hike when the monetary policy committee assembles around August.

Besides losing crucial Forex, the other options policy makers would be left with could be import tariffs, limits on external debt and off-market swap deals with oil importers.

HDFC bank's chief economist Abheek Barua, however hinted that the there may be some respite in oil prices. He also observed that the Rupee was stable.

"It's a close call and a tough balancing act but we expect the RBI to tilt in favour of a 'hold' when it meets next week for the monetary policy review," said Barua.

"The inflationary risks are still there but the rise in food prices (in June and July) has been much lower than the historical trend and this sort of subpar food inflation could be underlined as an offsetting factor against the MSP risk and elevated core inflation," he added.

More from Sify: