Indian central bank’s policy to keep the rupee stable at weaker levels may make the currency vulnerable to “speculative attacks” in case of large risk events, according to Australia & New Zealand Banking Group Ltd.
(Bloomberg) — Indian central bank’s policy to keep the rupee stable at weaker levels may make the currency vulnerable to “speculative attacks” in case of large risk events, according to Australia & New Zealand Banking Group Ltd.
Policymakers are focused on bolstering manufacturing and exports, but it’s not without costs, economists Dhiraj Nim and Sanjay Mathur wrote in a note.
“An engineered decline in INR volatility also dampens the incentive to hedge among exporters and importers,” they said. “These agents thus run the risk of getting caught unprepared when volatility picks up, say due to an exogenous event, stoking future swings in the currency. It also raises the probability of speculative attacks on the currency, in case of a large external risk event.”
The Reserve Bank of India has absorbed most of about $19 billion of inflows into local stocks and bonds this year, helping it beef up foreign exchange reserves and prevent appreciation in the rupee. The Indian rupee has the lowest implied volatility in emerging markets, according to data compiled by Bloomberg.
A spokesperson for the central bank didn’t immediately respond to an email seeking comments.
Even though the RBI has repeatedly said the rupee’s exchange rate remains market-determined, ANZ thinks the currency’s movement over the last two years is the evidence of a likely shift in its policy to keep it stable and relatively undervalued among peers.
Read: Rupee’s Plunging Volatility Leaves Investors Guessing RBI Moves
Considering that most of the global factors spurring depreciation in Asian currencies have eased, the rupee would likely be trending around 80.5 per dollar, if it followed the trend in Asian peers, the economists wrote. The currency fell 0.1% to 82.6550 against the greenback on Friday. India’s foreign reserves are down to $594 billion from their September 2021 peak of $642 billion.
“Even as the RBI is championing the use of the rupee as a policy tool, its approach may need to shift as the economic environment changes,” they said. “If its intervention distorts FX markets, they may paradoxically become vulnerable to future shocks.”
–With assistance from Anirban Nag.
(Updates rupee move, adds latest reserves data.)
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