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Informist, Thursday, Mar. 27, 2025

 

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--ANZ Bank's Nim: RBI keeping large forward book "problematic"
--CONTEXT: ANZ Bk Economist, FX strategist Dhiraj Nim's remarks in interview
--ANZ Bank's Nim: RBI's large forward book hurts credibility of FX reserves
--ANZ Bk Nim:Don't see rupee weaker than 88/$1 despite US reciprocal tariffs
--ANZ Bank Nim: Imported inflation to be an issue if rupee falls to 89-90/$1
--ANZ Bank's Nim: GDP growth may not rise to 7% even after RBI's rate cuts

 

By Pratiksha and Shubham Rana

 

NEW DELHI - The Reserve Bank of India running a very large forward book is "problematic" as it undermines the credibility of the amount of foreign exchange reserves the central bank holds, Dhiraj Nim, economist and FX strategist at ANZ Bank India, said.

 

"Having a very stretched net short book is a bit problematic because it undermines the credibility of your spot reserves. Ideally, one should be adding the spot and the forward book to understand the amount of reserves because that either has to be rolled over or paid up when the time comes," Nim told Informist in an interview.

 

Faced with a weakening rupee and widening of banking systemic liquidity due to its foreign exchange market interventions, the RBI in recent weeks has relied heavily on dollar/rupee buy/sell swap auctions to meet its multiple objectives. By the end of January, the central bank had a net short outstanding position of $77.53 billion, while the forex reserves stood at $630.61 billion. Since then, while the reserves have risen by about $25 billion, the RBI has also conducted buy/sell swap auctions for a similar amount. As such, India's forex reserves are closer to $550 billion than $650 billon, once adjusted for the RBI's net short forward position.

 

The saving grace has been the long-term nature of these swaps, with 80% of the $25 billion worth of auctions maturing in three years. This, Nim said, should allay some concerns. However, the infusion of durable liquidity through these swaps is not a free lunch as they distort forward premiums. Taking out dollar liquidity from the system pushes forward premiums lower, which in turn prompts speculatory positions to build up.

 

MARCH MADNESS

After a tumultuous few months, March has seen the rupee claw back meaningfully and it is down around 0.2% against the US dollar in 2025 so far. The Indian currency has surged over 2% this month owing to the dollar's weakness and exporters' dollar sales for conversion of their foreign exchange-denominated earnings into rupees before they close their books for the financial year. And while the RBI was perhaps expected to mop up dollars to shore up its reserves and prevent a rise in the rupee, it has "somewhat successfully instilled the sense that they want a two-way trading of the rupee", Nim said.

 

"They're not comfortable with one-sided bearish bets or one-sided bullish bets. They kind of have maintained a good range in which the rupee has fluctuated," he added, explaining that one reason why the rupee is being allowed to appreciate could be the looming uncertainty around US tariffs. "In letting the rupee appreciate ahead of tariff announcements to these levels, which we hadn't really expected, I think they've (RBI) created a bit of a room for the rupee to depreciate safely without jeopardising inflation trajectory going forward."

 

For Nim, the worst-case scenario for the rupee by the end of 2025, even in the face of reciprocal tariffs from the US, is 88 per dollar. While some impact of tariffs imposed by the US on India's exports will have to be borne by the exchange rate and may even be allowed by the RBI, the central bank will not want the rupee to "depreciate to a level which becomes alarming from an imported inflation perspective". According to Nim, while imported inflation is not a problem for India currently, it could become an issue if the rupee falls to 89-90 per dollar.  

 

7% GROWTH ELUSIVE

The RBI's massive rupee liquidity infusions have also been necessitated to ensure the Monetary Policy Committee's interest rate cuts are passed on to borrowers so that economic activity gets a push, with GDP growth seen falling to a four-year low of 6.5% in 2024-25 (Apr-Mar). Nim expects the MPC to deliver three more repo rate cuts of 25 basis points each in April, June, and finally in August, subject to weather conditions.

 

But interest rate cuts may not be enough to propel India's growth rate back above 7%. "I don't think domestic demand, as far as private final consumption and investments are concerned, is going to react a lot to the rate cuts," Nim said.

 

If headline retail inflation settles around 4% in 2025--it was at a seven-month low of 3.61% in February--and the MPC cuts the repo rate to 5.50% in the coming months, the projected real policy rate would still be about 1.5%, which according to Nim is not "extremely stimulatory". "Rate cuts are not going to have a significant upward impact on growth in FY27. Growth will bottom out through FY26 and remain around 6.3-6.4%. But I don't think 7% growth is happening anytime soon."

 

The MPC, which cut the repo rate for the first time in nearly five years in February, is scheduled to announce its next interest rate decision on Apr. 9. The RBI expects CPI inflation to average 4.2% in FY26 and GDP growth at 6.7%.  End

 

US$1 = INR 85.78

 

Edited by Vandana Hingorani

 

 

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