The Reserve Bank of India (RBI) is likely to keep the Indian currency from appreciating against major currencies to give a competitive advantage for Indian exports.
The rupee has been trading in a range of 61-63.50 levels over the past six months. Recently, it has come under pressure due to stronger-than-expected economic data coming out of the U.S. As per reports, the U.S. Federal Reserve may now look at June for hiking interest rates rather than the previously expected hike in September 2015.
Market has witnessed sharp up-moves in the Dollar index. “The recent weakening of rupee has been in line with the strength of the dollar index which is now at 100 and further upticks from these levels cannot be ruled out. The other emerging market currencies have also weakened against the U.S. dollar,” said Sidharth Rath, President (Treasury, Business Banking and Capital Markets), Axis Bank.
Presently, the dollar index is quoting above 100-mark at 100.30. Dollar index shows the relative strength of the dollar against other major currencies. After 2003, for the first time, it has crossed the 100-mark.
There are two baskets of currencies, which RBI always monitors to arrive at REER (Real Effective Exchange Rate) of Indian rupee: one is a basket of six currencies - U.S. dollar, Euro, Japanese Yen, Great Britain Pound, Swiz Franc and Australian Dollar; another basket contains 36 currencies, the countries with which India has major external trade. What RBI does is that keep an eye on inflation in these countries compared to India. Trade to remain competitive, the currency of the country in which inflation is high should depreciate against the currency of the country where the inflation is lower.
However, since April 2014, the rupee depreciated against the U.S. dollar only by around 4.5 per cent, because of huge inflow of funds through investments in equities and debt. In comparison, U.S. dollar appreciated against other major currencies by huge margin. For example, it appreciated against Euro by 24 per cent, Sterling Pound 14 per cent and Yen about 15-16 per cent.
“This shows that the rupee appreciated against all other major currencies but the US dollar. It also means that Indian export has become uncompetitive. As a result the RBI is making efforts to ensure that the Rupee do not appreciate,” said Ashutosh Khajuria, President, Treasury, Head of Network, Federal Bank.
Though stronger rupee adds to the disinflationary trend, its relative to other peer currencies may not entirely be good for India. With this thought, RBI has mopped up large inflows curbing rupee appreciation.
“While intervening in the market, the RBI buys the U.S. dollar so the rupee will not appreciate. Only by artificially creating the demand for U.S. dollar, the rupee could depreciate by around 4.5 per cent in the last 11 months or so. If RBI had not intervened, the Rupee would have appreciated,” Mr. Khajuria added.
This was reflected in country’s foreign exchange reserve, which rose to an all time high of $338 billion as on previous Friday (March 6, 2015). It increased to $320.6 billion in the first nine months of the current financial year. In these nine months, it rose by $31 billion compared to a fall in 2013-14. In the last two months, it increased by $17 billion. The previous all time high was at $ 321 billion recorded in 2010 and $ 316 in 2008.
“These reserves put the country in much better position to tackle the probable Rupee weakness when the U.S. Fed actually starts increasing the rates. The market has witnessed the RBI resolve to intervene on both sides as it dampens rupee volatility and ensures stable environment,” Mr. Rath added.
The rupee was at 59.95 a dollar as at end March 2014. Compared to the average close of the week, which was at 62.72, the rupee fell only by 4.62 per cent.
On the technical side, 62.82 was a crucial resistance level to watch which has been breached convincing and market has closed on last Friday at 62.97. According to Mr. Rath, “this breach could trigger rupee moving higher.”
If the RBI will continue its intervention, the Indian currency will have a gradual depreciation.
