Summary of this article
SBI report suggests RBI can use forex reserves to stabilise rupee
Rupee weakens past 95 per dollar amid global tensions
Report suggests steps to ease forex demand and volatility
The Reserve Bank of India (RBI) can use its foreign exchange reserves to support the Indian Rupee against the US Dollar in the wake of high volatility due to global tensions and an increase in oil-related dollar demand, stated a report published by the economic research department of the State Bank of India (SBI).
Rupee Under Pressure Amid Global Uncertainty
The Indian Rupee depreciated against the US Dollar on Monday and breached the 95 per US Dollar mark during intra-day trade, before closing 7 paise stronger at 94.78 per US Dollar. The Indian Rupee weakened due to the escalation of the West Asian conflict, causing volatility in the global markets.
The Indian Rupee is also facing pressure due to high crude oil prices and a rise in demand for the US Dollar. The Rupee weakens every time the prices of crude oil rise because of the high demand for dollars for oil imports during such periods.
SBI Flags Adequate Forex Reserve Buffer
RBI has adequate forex reserves to intervene in the Forex market and support the Indian Rupee against the US Dollar. The report has stated that the forex reserves of the Indian government are adequate to cover imports for over 10 months. Forex reserves of over $700 billion are sufficient to prevent any kind of volatility in the Forex market. There is no need for such a high Forex reserve only in times of emergencies and that timely intervention is possible, noted SBI.
Suggestion For Separate Window For OMCs
The SBI report has also suggested that the RBI might consider opening a separate window for oil marketing companies (OMCs), as the dollar demand for them is around $250-300 million on a daily basis. Their dollar demand on an annual basis is estimated at $75-80 billion.
Separating the demand for oil marketing companies from the market as a whole will help in understanding the real situation of supply and demand in the forex market. This will also help in understanding the results of the measures taken to curb the volatility.
Impact Of NOP Norms On Market Dynamics
RBI's decision to restrict the net open position in rupee-denominated currency for banks to $100 million might have led to the emergence of discrepancies between the onshore and the offshore markets, the report suggested.
Domestic banks are generally long in the onshore market but short in the offshore market. The situation is vice versa for the foreign banks.
The one-year non-deliverable forward rates rose to 4.19 per cent from 3.43 per cent, while the one-month rates rose to 0.67 per cent from 0.33 per cent. The rates in the offshore market were also higher at around Rs 98.41.
Liquidity Concerns And Capital Flows
The report has revealed that the current system might create difficulties for the banks, and the RBI might consider restricting the $100 million only to the trading books.
It also pointed out that foreign portfolio investors, as well as some foreign direct investors, might withdraw their money in the face of continued uncertainty. This could lead to a rise in demand for dollars, thereby affecting liquidity in the banking system.
On a broader level, the report reiterated that the RBI has enough reserves in its kitty to handle currency volatility in times of global uncertainty.
