RBI not expected to use reserves to shore up Re

MUMBAI: The Fed rate hike last week resulted in the Dollar Index, which tracks the greenback’s performance against a basket of currencies, hitting a 20-year high. Dealers expect the rupee to weaken by a couple of percentage points as they see some overvaluation built in on expectations of inflows.

Until last weekend, the rupee has been holding firm despite a sharp depreciation of the Chinese Yuan as large inflows were anticipated because of mega initial public offerings (IPOs) like the Life Insurance Corporation. However, most of the large investors in the anchor round were domestic mutual funds.

“Despite high crude prices due to rising import bill, the external situation is under control. With RBI holding around $600bn in forex reserves and $65bn in forwards, India is in a comfortable position,” said Ashhish Vaidya, head of treasury and markets at DBS Bank Ltd. “The more-than-expected tightening by the US Fed and the continued Russia-Ukraine standoff are putting pressure on the rupee and the entire emerging market space,” Vaidya added.

India is hit worse than other emerging economies because of its large oil import bill. The central bank also appears to be letting the domestic currency slip a little. The statement that the RBI will build up its reserves is seen as an indicator that it will not use up reserves to support the currency.