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Informist, Thursday, Nov. 7, 2024

 

By Pratiksha

 

NEW DELHI – The Reserve Bank of India has resolutely and visibly tightened its grip on the rupee's exchange rate for over a year now, clamping down even on moderate fluctuations. However, with Donald Trump getting re-elected as the US President, the Indian central bank may have to revisit its exchange rate strategy.

 

On Wednesday, the rupee ended at a new all-time low of 84.28 a dollar after Trump returned to the White House in the US. In the run-up to the election, foreign investors were already on the edge, pulling out over $11 billion in October from India. In response, the RBI heavily sold dollars to slow the rupee’s fall, reducing its foreign exchange reserves by $20 billion in the four weeks ended Oct. 25. Sample the following to understand how the RBI has responded to the outflows and volatility: Tuesday, Informist reported quoting market sources that the central bank sold around $5 billion in just a few days to stop the rupee from weakening sharply.

 

Wednesday, though, was somewhat different, with the apex bank aggressively selling dollars around 84.20 a dollar in the first half of the day only to let the currency fall to a record low of 84.28 by close once it was clear that Trump had made a historic comeback.

 

"The intervention intensity, if they (RBI) intend to really keep it (exchange rate) tight, will have to go up (post Trump’s victory). It will not be as easy as it was over the last few years," said Anshul Chandak, head of treasury at RBL Bank Ltd.

 

"There are too many factors that turn negative for the rupee after Trump winning," said a treasury head at a foreign bank. "There is the US and then China. There has to be a change in their (RBI's) strategy with all this happening."

 

Questions have been raised in recent months about RBI's strategy of squeezing all volatility out of the exchange rate. While it has managed deftly so far, thanks to its $700-billion war chest, the medium-term risk-off sentiment that a Trump Presidency brings is not to be sneezed at. What leads to the broader risk-off mood among foreign investors is Trump's protectionist policies and volatile, shoot-from-the-hip attitude.

 

Should the RBI choose to continue defending in the same vein going forward, its task is made even more challenging by the fact that China is firmly in Trump's crosshairs when it comes to tariffs and other trade barriers. And if the Chinese economy weakens, its stimulus measures will result in outflows from India, as seen recently.

 

According to reports, the implied volatility of the Chinese yuan against the greenback on Wednesday was around record highs, with the offshore yuan falling over 0.8%. Trump, who told his supporters in Florida Wednesday that promises made would be kept, has previously vowed to impose a 10% tariff on imports from all countries and 60% duties on Chinese imports.

 

Historically, the RBI has allowed the rupee to depreciate in case of a sharp fall in the Chinese yuan in order to maintain export competitiveness.

 

According to ICICI Bank economists, a rise in US yields and pressure on the Chinese yuan could work as twin forces that ensure the dollar/rupee trades with an upside bias. The private bank has raised its near-term forecast for the exchange rate to 84.00-85.00 per dollar in the near-term, with the RBI’s interventions limiting the pace of depreciation. However, there are only so many dollars that the RBI can sell. Its foreign exchange reserves may be large, but if history tells us anything, it is that even its rapid decline at high levels can weaken confidence.

 

To be sure, a section of the market is confident the central bank will, no matter what, continue to protect the Indian currency from sharp depreciation. "Currently, considering India's FX reserves and the overall CAD (current account deficit) position, we believe that the RBI is well positioned to manage the volatility following the US election results," said Sameer Karyatt, executive director and head of trading at DBS Bank India Ltd. 

 

The RBI has so far comfortably kept the rupee on a leash, even as it built the fourth-largest foreign exchange reserves in the world. Performing the same task is going to be far more difficult now and the central bank may have to change how it keeps the rupee safe.  End

 

US$1 = INR 84.28

 

Edited by Deepshikha Bhardwaj

 

 

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