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It appears that the Reserve Bank of India (RBI) has won the current round against a market that clearly believes that the rupee needs to be weaker. Heavy intervention when the rupee fell below 75 to the dollar last week succeeded in pushing the rupee back above that level on Friday, and the positioning was such that stop losses must have been triggered and the currency rose all the way to 74.35 at the close. However, Monday morning and the currency is sagging again—it crossed 75 again in intra-day trading, but RBI is having none of it and has pushed it back down to a still-weak 74.85.
So, where does it go from here?
Clearly, the second wave of the coronavirus and the fumbling efforts of the government to manage it are the definitive drivers of rupee weakness, as they are of equities. And while RBI is valiantly fighting to prevent more rupee weakness—as much to ensure that inflation is kept contained as anything else—it is hard to see how it can win the war when it has no weapons to fight the real cause. To be sure, it does have nearly $600 billion of reserves, and it is conceivable that if it were to sell, say, 15% of that in a week or 10 days, it may be able to slow down the attack.
This would also tighten liquidity, which is the last thing the economy needs now, except that it would help control inflation and might—a big might—be able to convince investors that at least one arm of the Indian government is on the job and acts as if it knows what it is doing.
I note that the one-month NDF spread has been holding around 10 paise, which, at least, suggests the pressure is steady and not accelerating. Again, all the trend-lines are pointing upwards, although we do appear to have moved definitively from the 72.xx to 73.xx range to a wider 73.xx to 75.xx range.
On the other hand, many health analysts believe this wave will peak sometime over the next month or so, assuming that the people and the government begin to behave sensibly—both relatively tall orders.
To ensure that this battle doesn’t turn into a crisis—I note that the average of the six major declines (defined by the low being a new all-time low) since 2008 has been a huge 10 rupees—more than just intervening heavily, RBI needs to tell the market, in no uncertain terms, that it is willing to sell more than $100 billion, if need be, to steady the rupee.
The author is CEO, Mecklai Financial