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Informist, Friday, Feb. 28, 2025

NEW DELHI – Speculative trades against the rupee are likely to have reduced from this month owing to a sharp correction in the Indian currency's real effective exchange rate and the Reserve Bank of India's heavy intervention, ICICI Securities Primary Dealership said in a report Friday.

"Overall, speculative short interest on rupee is likely to have reduced from Feb onwards after such trades were put on heavily earlier as rupee became deeply overvalued in last quarter and amidst broader upmove in USD (dollar)," it said. The rupee's real effective exchange rate against a basket of 40 currencies, in terms of trade-based weights, fell to an eight-month low of 104.82 in January from 107.13 in December. After touching a record high of 108.14 in November, the significant correction in the REER came after a sharp depreciation in the rupee against the dollar.

"RBI's FX intervention operation around the middle of month that was done to visibly hurt speculative positions was also seen to have been effective, after the central bank first allowed rupee overvaluation to correct," according to the report. "The tactic was also unexpected given RBI has not resolved in the past to intervene in such large quantum in short time span and to curb speculative interest." The RBI had ramped up its support for the Indian rupee drastically earlier this month, with market participants estimating that the central bank likely sold almost $20 billion in the spot market in the week ended Feb. 14.

The primary dealership also said the RBI's foreign exchange reserves are lower if its net outstanding dollar/rupee forward contracts are taken into account. ICICI Securities Primary Dealership said that while India's import cover of foreign exchange reserves is still over 10 months, the import cover of 'true' foreign exchange reserves--comprising spot foreign exchange reserves and the outstanding short forward book--is estimated at 9.4 months.

"But the central bank is likely focussed on spot FX reserves only, and there is still scope to intervene by $80-100 billion in that context. RBI may believe large chunk of its short USD positions in forward book mirrors build-up of speculative positions and those would not act as a durable drag on its FX reserve position," it said. 

The report also pointed out that the current phase of rupee depreciation was peculiar in terms of balance-of-payment dynamics, as most earlier phases of rupee weakness would coincide with concerns around the current acocunt deficit being accentuated by higher crude oil prices and a rising dollar, unlike this time. So far this year, the rupee has depreciated 2.2% against the dollar. 

"Interestingly, current account balance may likely drift into surplus mode in the current quarter, with favourable seasonality, lower gold imports, and strong services exports acting as catalysts. Capital account balance may be similarly weak as Oct-Dec period however, implying BoP deficit," it said. However, the primary dealership does not see a threat to the inflation outlook from imported pressures stemming from a weaker rupee due to negative output gap and rigid domestic auto fuel prices.

Further, the report said foreign portfolio outflows in the current cycle may persist for some more time till they accumulate to between 0.5% and 1% of the market capitalisation. It pointed out that the Indian markets are seeing more outflows as compared to other Asian markets. So far in 2025, foreign portfolio investors have net withdrawn $10.60 billion from the Indian markets. The report also highlighted that FPI inflows into debt may fade away as the process of inclusion in the JP Morgan Government Bond Index–Emerging Markets ends in March.

Talking about the impact of US tariffs on India, the primary dealership said that if the US were to charge matching effective tariffs on Indian imports, implying an increase of around 7.5%, it would be a smaller hike than the threatened universal tariffs of 10-20%. "Investors shouldn't expect India to offset some of this impact via a weaker rupee, unlike the revealed preference of other more export-dependent and current account-surplus jurisdictions such as China (based on the 2018 tariff hike episode)," it said.

ICICI Securities Primary Dealership sees scope for two more rate cuts by the RBI's Monetary Policy Committee. This view stands even if the US Federal Reserve does not deliver more accommodation this year, it said. The primary dealership expects a rate cut by the rate-setting panel at the upcoming April meeting. In February, the committee had unanimously decided to lower the policy repo rate for the first time in nearly five years, bringing it to 6.25% from 6.50%.  End

US$1 = INR 87.49

Reported by Pratiksha

Edited by Rajeev Pai

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