Will RBI’s move to stop rupee’s free fall backfire? What experts say – The Times of India
The Reserve Bank of India’s move to stem rupee’s fall may end up acting as a deterrent for global investors. The central bank’s most aggressive push in nearly a decade to stabilise the rupee could end up deterring the very global investors the market has worked hard to attract.With the currency sliding to fresh lows during the Iran conflict, the Reserve Bank of India directed domestic banks to unwind bearish positions in both onshore and offshore markets. The move, however, came without an immediate clarification, unsettling lenders and investors who were left uncertain about the central bank’s intentions and concerned about its approach to managing risks, according to bankers familiar with the matter quoted in a Bloomberg report.Following these restrictions, the rupee has rebounded more than 2 per cent to 92.66 against the dollar as of Thursday. This recovery, though, has come with side effects. Banks could face losses amounting to hundreds of millions of dollars, as estimated by Jefferies Financial Group Inc. At the same time, hedging has become more expensive, complicating efforts by investors to protect their positions, while foreign investors have cut back their exposure to bonds.The sudden nature of the measures and tighter controls risk creating an impression that India may be stepping back from its efforts to deepen integration with global financial markets. Those reforms, rolled out after the 2013 taper tantrum when the Federal Reserve’s plans to reduce bond purchases led to capital outflows from emerging markets, had strengthened India’s attractiveness and eventually led to its inclusion in JPMorgan Chase & Co.’s bond index in 2024.
RBI’s intervention for rupee
Over the years, the rupee market has also broadened, with the currency gaining traction in major financial centres such as London and Singapore, where it is now traded more actively than within India.The scale of intervention and the absence of clear communication have raised concerns over policy consistency and transparency, said Sanjay Guglani, chief investment officer at Singapore-based Silverdale Capital Pte Ltd., which manages about $1.5 billion. He characterised the RBI’s actions as discretionary, noting that “this raises the bar for rupee assets among offshore investors.”The steps were set in motion in late March, when the RBI imposed a cap on banks’ daily currency positions in the domestic market at $100 million, to be enforced by April 10. This triggered a rush to unwind roughly $30 billion worth of arbitrage trades.As the rupee continued to weaken despite these actions, the central bank soon widened the restrictions to offshore derivatives. It barred lenders from offering non-deliverable forwards, instruments that allow investors to take positions on the currency without actually holding it. Taken together, these measures represent a coordinated effort to eliminate bearish bets on the rupee and curb speculative activity across markets.The focus was on investors using NDFs to build short positions on the rupee, as well as banks engaged in arbitrage strategies that involved buying dollars domestically and selling them offshore to take advantage of pricing differences. Both sets of activities had added to the downward pressure on the currency.Economists at BofA Securities Inc. cautioned that such actions could undo years of liberalisation aimed at preventing a repeat of the 2013 episode. In a note led by Rahul Bajoria, they said the steps “essentially break the link RBI had cultivated in the last decade.”Experiences from other countries highlight the risks. China’s tightening of offshore yuan liquidity between 2015 and 2017 helped steady the currency but led to funding pressures and unsettled global investors. Similarly, Malaysia’s 2016 restrictions on offshore ringgit trading reduced speculative activity but drained liquidity. In both instances, the measures came with reputational consequences, illustrating the delicate balance India needs to maintain.The RBI’s swift action comes against a weakening external environment marked by higher US tariffs and a surge in energy prices following the Iran conflict, a challenging combination for an oil-importing country with a persistent current account deficit. Elevated crude prices have pushed up the import bill, while a global shift toward safe-haven assets has strengthened the dollar. A temporary two-week ceasefire between the US and Iran could provide some respite.RBI Governor Sanjay Malhotra said on Wednesday that the central bank continues to focus on developing currency markets and advancing the internationalisation of the rupee, adding that the recent measures should not be seen as a change in policy direction. In his first public comments after the steps were announced, he emphasised that the measures are temporary and will not be permanent.According to a person familiar with the matter, the Finance Ministry has consulted external experts for suggestions to stabilise the rupee. The outreach reflects concerns within the government that foreign institutional investors may remain cautious if depreciation risks persist. The latest steps do not bar foreign investors from hedging through domestic banks, provided such transactions take place in the deliverable market and are not speculative in nature. Nor do they prevent other participants from engaging in offshore NDF trading.Soumya Kanti Ghosh, chief economic adviser at State Bank of India and a member of the prime minister’s economic advisory council, said “such measures are likely to create a wedge between offshore and onshore markets.” He added that this divergence “might create a vicious loop,” where offshore premiums continue to rise.Some analysts believe the central bank’s actions may provide only limited support to an economy dealing with a current account deficit and capital outflows. Elevated oil prices could further strain inflation and widen the deficit, adding to pressure on the rupee. For now, restrictions on the NDF market have reduced liquidity and made hedging more challenging. The growing divergence between offshore and onshore markets is already affecting foreign appetite for Indian bonds and could weigh on future inflows.“Foreign investors need a reliable and predictable investment framework to maintain or increase their portfolio allocations to India,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA.