As the Indian rupee falls even more, the RBI may need to add to its reserves, says an HDFC Bank economist.
Mumbai: Abheek Barua, Chief Economist at HDFC Bank, said that if the Reserve Bank of India wants to stop the rupee from falling, it may need to find ways to add to its foreign exchange reserves. For example, it could try to get non-resident Indians to deposit more money.
So far this year, the Indian rupee has lost 9.5% of its value. To protect the rupee, the central bank has sold dollars, bringing the country’s forex reserves down to $545 billion from a high of $642 billion a year ago.
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In a note this week, Barua said, “The central bank should step in to make sure that India’s fundamentals are not overshadowed by a falling currency.”
Even though a weaker currency might help close the trade gap in some ways, he said, the damage to the capital account from investors losing faith will outweigh these benefits.
Barua says that if the central bank’s foreign exchange reserves drop to near $500 billion in the next few months, it may need to think of ways to add to them.
“At this point, we need more money to stabilise the rupee and let the RBI fill up its reserves,” he said.
As a way to get more money into the country, the RBI let banks take foreign currency deposits from non-residents at higher rates and let foreign investors buy short-term local debt in July.
Analysts say that these steps have only helped a little bit.
It might be time for the central bank to get ready for other options, like what it did in 2013 when the rupee fell because the U.S. Federal Reserve said it was going to stop buying as many bonds.
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Barua said it might be time to think about the taper tantrum playbook again, subsidise forwards, and get lumpy deposits from people who don’t live in the country.
“NRIs are aware of India’s strong fundamentals and could be persuaded to deposit their dollars in India at attractive rates,” he said.
