Stories
Rupee Could Hit 96 To 97 Per Dollar By Year-End Despite RBI Intervention
- •Barclays expects the rupee to weaken past 96 to 97 per dollar by the end of the year despite recent RBI support measures.
- •The RBI introduced steps to curb speculative dollar demand, including new cash reserve requirements for forex derivative contracts.
- •Recent central bank interventions triggered a near-term tactical rally of about 1% in the rupee.
- •Underlying macroeconomic pressures like elevated crude prices and a pressured trade deficit remain intact.
- •The RBI also raised the daily minimum cash reserve requirement for banks from 90% to 99% to drain excess liquidity.
Key Questions Answered
To manage liquidity and curb speculative dollar demand, the RBI mandated that banks set aside a 20% cash reserve on specified forex derivative contracts exceeding $2 million. Additionally, the central bank tightened rules on cancelling and rebooking rupee-linked contracts, lowered the threshold for unbacked forex derivative positions from $100 million to $5 million, and arranged for three public sector oil marketing companies to meet their daily dollar requirements through designated banks rather than the open market.
The RBI raised banks' daily minimum cash reserve requirement from 90% to 99% for the fortnight ending October 31, while keeping the overall cash reserve ratio at 3%. This adjustment eliminates the leeway banks previously used to park funds in variable rate reverse repo facilities, aligning the overnight call money rate closer to the repo rate.
According to Barclays' Mitul Kotecha, despite a tactical near-term rally triggered by recent RBI interventions, the rupee is expected to weaken and potentially breach the 96 or 97 per dollar levels by year-end. This projected depreciation is driven by persistent external factors, including weak foreign portfolio investment flows, a pressured trade deficit, and Brent crude prices ending the year at $115 per barrel.
