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India’s central bank has called on the country’s lenders not to add to existing bets against the rupee as it seeks to prop up a currency that has recently hit record lows.
Officials from the Reserve Bank of India on Tuesday contacted some of the country’s largest banks with the aim of easing pressure on the rupee, according to two people with knowledge of the matter.
The currency has fallen to a series of new lows against the US dollar over the past month — making it one of the worst performers in Asia — despite regular market interventions by the RBI designed to stem the decline and bolster investor confidence in the world’s fastest growing large economy.
“They are trying everything,” said a currency strategist at a major Indian brokerage.
One Mumbai-based banker said the central bank has over the past few years quietly moved from a “managed float” currency strategy — where the rupee is allowed to fluctuate within a certain range — to a “creeping peg” where the exchange rate is allowed to move gradually over time. The latest instruction was “broadly a shot across the bow for banks” to warn them against adding to the pressure on the rupee, the banker added.
The rupee was little changed on Wednesday at 83.92 to the dollar, just above Monday’s all-time low of 84.16, according to LSEG data. Its recent weakness has been attributed to outflows from local stocks, the unwinding of carry trades, a recent increase in equity taxes, and demand for dollars from the country’s importers.
India’s currency has continued to hit “fresh record lows amid persistent equity outflows”, said Aditi Gupta, economist at Bank of Baroda. “RBI is likely to keep a steady watch on the market developments.”
India was also hit this week by volatility across global markets, which followed last week’s Bank of Japan rate rise and concerns about a potential US recession, although its equity markets have since rebounded.
The RBI was “concerned with any sudden and sharp moves”, said one Indian banker. “Market turmoil earlier this week in Japan and the US maybe prompting this.”
The central bank said it was unaware of any instructions issued to India’s lenders, which were first reported by Reuters.
The RBI, which most economists expect to keep its key interest rate on hold at 6.5 per cent on Thursday, has been building up India’s foreign-exchange reserves, which have risen 7.6 per cent this year to $667bn.
In April, RBI governor Shaktikanta Das said: “It has always been the priority of the Reserve Bank to ensure stability of the Indian rupee.” The reserve accretion “acts as a buffer against future risks, especially in a situation when the cycle turns”, he added.
Barclays analysts last month said they do not expect any major changes in the RBI’s intervention strategy even after Das’s term finishes at the end of this year. The “current policy has served the country well, with rupee volatility falling and FX reserves growing steadily”.