2024-08-07 12:49:30
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India’s central bank has called on the country’s banks not to increase existing bearish bets on the rupee in a bid to support the currency, which has recently fallen to a record low.
Reserve Bank of India officials on Tuesday contacted some of the country’s largest banks with the aim of easing pressure on the rupee, according to two people familiar with the matter.
The rupee has fallen to a series of lows against the dollar over the past month, becoming one of Asia’s worst performing currencies, despite regular market intervention by the Reserve Bank of India to stem a slide in the currency and shore up investor confidence in the world’s fastest-growing large economy.
“They are trying everything,” said a foreign exchange strategist at a large Indian brokerage.
A Mumbai-based banker said the RBI had quietly moved over the past few years from a “managed float” currency strategy, where the rupee was allowed to move within a certain range, to a “gradual peg,” where the exchange rate is allowed to move gradually over time. The latest directive was “roughly a warning to banks” not to add pressure on the rupee, the banker added.
The rupee was little changed at 83.92 against the dollar on Wednesday, slightly above its record low of 84.16 hit on Monday, according to data from the London Stock Exchange. The rupee’s recent weakness has been attributed to outflows from domestic equities, unwinding of carry trades, a recent increase in stock taxes and demand for dollars from the country’s importers.
The Indian currency “keeps hitting new lows amid ongoing equity outflows,” said Aditi Gupta, an economist at Bank of Baroda. “The Reserve Bank of India is likely to keep a close eye on market developments.”
India was also hit by global market turmoil this week, fueled by last week’s Bank of Japan rate hike and concerns about a possible U.S. recession, though shares have since rebounded.
The Reserve Bank of India is “worried about any sudden and drastic move,” said an Indian banker. “Market turmoil in Japan and the US earlier this week could have been the reason for the move.”
The RBI said it was not aware of any instructions from the Reserve Bank of India to its banks, which were first reported by Reuters.
Most economists expect the Reserve Bank of India to keep its benchmark interest rate unchanged at 6.5% on Thursday. The bank has been adding to India’s foreign exchange reserves, which have risen 7.6% so far this year to $667 billion.
In April, Reserve Bank of India Governor Shaktikanta Das said: “Ensuring the stability of the Indian rupee has always been the top priority of the Reserve Bank of India.” He added that reserve accumulation “can serve as a buffer against future risks, especially in the event of a cyclical turn.”
Barclays analysts said last month that they do not expect any major changes in the RBI’s intervention strategy even when Das’ term ends at the end of this year. “The current policy has worked well for India, with rupee volatility falling and foreign exchange reserves growing steadily,” they said.
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