Taper Tantrum Playbook Key for RBI as Rupee Continues to Slide to All-Time Highs
With the rupee sliding to new record lows almost every week, analysts say Indian policymakers can take inspiration from their 2013 crisis plan to limit further losses.
The currency is down almost 7% this year, reminiscent of the selloffs of nearly a decade ago, when fiscal and current account deficits also widened, inflation accelerated and US Treasury yields increased.
There are indications that the authorities are heeding the lessons, having already raised import duties on gold and announced measures to attract more foreign inflows. The Reserve Bank of India has also announced its intention to settle international trade in the local currency and has nearly $600 billion in foreign exchange reserves, which it has deployed to protect the rupee.
Here are some of the measures that can be activated:
Currency exchange window for oil companies
The RBI has the option of reinstating a currency swap window for state oil companies to meet their demand for dollars, said Aastha Gudwani, Indian economist at BofA Securities. This decision proved to be very effective in 2013 in curbing demand for dollars, with oil companies being among the biggest buyers of greenbacks.
Defense of interest rates
Although drastic rate hikes are not expected in 2013, “a certain minimum amount of interest differential must be maintained between the repo rate and the Fed Funds rate”, according to Kaushik Das, an economics economist. chief for India at Deutsche Bank, which expects another base hikes of 160 points on top of the 90 points since May.
Raise funds in dollars
SOEs may be allowed to raise additional dollar funds through quasi-sovereign bonds. The RBI has already doubled the amount companies can raise via overseas borrowing to $1.5 billion.
Accelerated bond inclusion
An accelerated plan for inclusion in global bond indices can help and attract foreign entries.
The currency futures market has increased in volume, giving the central bank a powerful intervention tool to curb speculation. In 2013, the RBI banned banks from proprietary trading in currency futures and options and also restricted trading positions by reducing limits.
Brakes on capital outflows
This may dampen outward direct investment by domestic companies as well as remittances from individuals, depending on the intensity of the rupee’s depreciation, said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd.