'Unchecked FX depreciation...': What Radhika Rao says on rupee, RBI intervention

Radhika Rao, Senior Economist & Executive Director at DBS Bank, said the Reserve Bank of India (RBI) has signalled an all-out effort to stabilise rupee. This included exploring potential rate hikes, further tranches of currency swaps, special non-resident deposit scheme and foreign currency debt to draw inflows and backstop the currency, she said on Friday.

Rao noted that the rupee’s initial depreciation was viewed as a shock absorber to better reflect underlying macro shifts. But now the authorities are concerned: "Unchecked FX depreciation could reinforce additional currency weakness, rather than helping to rebalance the external accounts," she said.

The economist believes closer scrutiny of outbound FDI and encouraging exporters to channel proceeds to the onshore markets might be pursued. Easing of oil prices concurrently will help stabilise the currency and risk sentiments, Rao said on Friday in a note titled "India markets: Consecutive rupee lows prompt market intervention.

Rao said RBI's revived monetary operations to slow rupee’s decent, after the currency came within touching distance of a record low of 97 per dollar this week. A USDINR buy/sell swap worth $5 billion was announced, which will manage rupee liquidity and moderate forward premiums. 

"In the run-up to the monetary policy review in early June, markets are likely to increasingly price in the likelihood of a hike, especially if the rupee remains under pressure and a resolution on US-Iran conflict proves to be elusive. Incremental fuel price hikes, pickup in food and rising business inflation expectations also provide more teeth to the inflation argument," she said.

Rao said bond markets are focused on the size of the RBI’s annual dividend contribution to the coffers, which will boost revenue uptake

"Dividend payout might be close to Rs 2.7-3 lakh crore (0.5-0.7 per cent of GDP). This compares to Rs 3.2 lakh crore projected in the FY27 Budget from state owned companies as well as surplus transfers from the central bank and Rs 2.7 lakh crore last year," she said.