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The recent depreciation in the Indian rupee after February 27 (start of the current conflict in West Asia) remains broadly in line with movements seen in other global currencies, and does not signal excessive weakness, according to a report by the State Bank of India.
The report noted that the rupee's movement in the current phase reflects global uncertainty, adding that currencies which had appreciated earlier have corrected more sharply, indicating that using the rupee as a "shock absorber" has limits beyond a certain inflexion point. It stated, "The rupee depreciation post 27th Feb... is in fact in line with other currencies, and in fact better than currencies which appreciated significantly". It highlighted that the present situation differs significantly from earlier episodes, such as 2013, when the exchange rate was highly volatile, and the Reserve Bank of India had introduced measures like the FCNR(B) window to stabilise the foreign exchange market. "In the current scenario, overseas channelled debt mop-up does not look desirable," the report said, citing decoupling of yields in developed markets from benchmark funding rates, which could distort borrowing costs. It also pointed out that hedging costs for such exposures could be significantly high. The report emphasised that India's external position remains strong. It noted that foreign exchange reserves currently cover more than 10 months of imports, while short-term debt stands at less than 20 per cent of reserves. Volatile capital flows account for 64.5 per cent of forex reserves. "With over USD 700 billion in reserves, the buffer is sufficiently strong to deter speculative moves through market intervention," the report stated. To manage rupee volatility more effectively, the report suggested several policy measures. It is recommended that oil marketing companies (OMCs) be provided a special window to separate their daily dollar demand of around USD 250-300 million from regular market activity, which could help ease pressure on the currency. It also noted that recent steps by the RBI to rationalise banks' open positions may have led to divergence between onshore and offshore markets. Domestic banks are generally long in onshore markets and short offshore, while foreign banks show the opposite trend. Further, the report suggested that the RBI could consider conducting "Operation Twist" to manage yields. This would involve pushing up short-term yields while moderating long-term yields to ensure that various reference rates remain aligned with policy rates in a calibrated manner. Additionally, it recommended that liquidity conditions be managed carefully to support the rupee. Overall, the report indicated that while global uncertainties continue to exert pressure on currencies, India's strong macroeconomic fundamentals and adequate reserves position provide a significant cushion against volatility. (ANI)
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