India’s foreign-exchange reserves are at a record and approaching the $500 billion mark, and yet, the rupee is Asia’s worst performer over the past three months.
That’s because the Reserve Bank of India doesn’t seem to be in a mood to give the currency a free run even as most of its regional peers have rebounded from the virus-induced selloff. Indonesia’s rupiah, the rupee’s high-yielding counterpart, is leading the gains.
Analysts say the central bank is adding to reserves to guard against a likely downgrade in India’s credit rating or to ensure a bigger transfer of surplus to the revenue-starved government. The RBI likely bought about $9 billion in the forex market in the four weeks ended May 29, according to Bloomberg Economics, pushing up reserves to a record $493.5 billion.
“The rupee is unable to do it, inspite of the surge in capital inflows, due to the dollar buying spree from the central bank,” said Anindya Banerjee, currency strategist at Kotak Securities Ltd. The mop up is sign that the RBI sees the inflows as temporary and prone to reversal if growth fails to pick up, he said.
RBI will continue to buy dollars at every opportunity to guard against contagion, Bank of America economists Indranil Sen Gupta and Aastha Gudwani wrote in a note Wednesday. The central bank will buy $45 billion of forex and follow an “asymmetric forex policy” — buy the dollar on declines and let the rupee depreciate if the greenback strengthens by a similar extent, they wrote.
The rupee has lost 2.8% in the past three months, having hit a record low of 76.9088 per dollar in April. It was trading down 0.3% to 75.7950 at 12:10 p..m. in Mumbai on Thursday.
India’s equity markets have seen foreigners step up purchases, unfazed by Moody’s Investors Service’s downgrade of the nation’s rating last week. They’ve poured $2.7 billion into stocks so far in June, the most among big Asian markets, on expectations that the economy may recover faster than expected as the government gradually lifts the world’s biggest lockdown.
This article was originally posted on finance.yahoo.com/news/.