In order to stabilize the weakening rupee, the Reserve Bank of India may need to identify measures to bolster its foreign exchange reserves, such as by enticing non-resident Indians to deposit more money. India’s central bank is the Reserve Bank of India (RBI), which was established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India is in charge of regulating the currency and credit systems of India and uses monetary policy to maintain financial stability there. The Reserve Bank of India (RBI) is India’s central bank. Originally established as a private organization in 1935, the RBI was nationalized in 1949. The RBI’s primary mission is to oversee the entire Indian financial sector, which includes commercial banks, other financial institutions, and non-banking finance companies.
MUMBAI (Reuters) – In order to stabilize the rupee’s decline, the Reserve Bank of India may need to find ways to refill its foreign exchange reserves, such as by enticing non-resident Indians to deposit more money, according to Abheek Barua, the chief economist at HDFC Bank. The central bank of India has been defending the rupee with dollar sales, which have reduced its foreign exchange reserves to $545 billion from their peak of $642 billion a year ago. As a result, the Indian currency has fallen by 9.5% so far this year. This week, Barua stated in a letter, “The central bank should intervene to prevent a falling currency from overriding India’s fundamentals.”
In a note, the Japanese investment house Nomura stated that Asian governments and central banks may need to reevaluate certain measures as a second line of defense because they have previously relied on those measures to strengthen foreign exchange reserves. Nomura added that the RBI had previously attempted, among other things, to halt the rate of capital outflows in India, relax restrictions on external commercial borrowings, and introduce non-resident deposit schemes, all of which could help alleviate pressures caused by currency depreciation.
Any significant dollar sales will tighten liquidity (and interest rates) and begin to stifle growth, limiting the RBI’s policy options now.OMO (buying bonds) can, of course, be used by the RBI to add liquidity; however, as policy rates are still being tightened, this can send confusing signals to the market. The rupee is currently in a downward trend, and the RBI will favor flexibility over exchange rate interest rates. Senior representatives from the RBI, the external affairs ministry, and the finance ministry attended the meeting.
An authorized Indian bank can open special rupee Vostro accounts for correspondent banks of any partner trading nation in accordance with the arrangement that the RBI announced on July 11.
Because they were concerned about being impacted by the sanctions imposed on Russia by the United States, private and public sector banks have been reluctant to open and manage these Vostro accounts. A devalued currency might help close the trade imbalance, but the harm to the capital account caused by diminished investor confidence will outweigh this benefit, the economist added. If the pool of foreign exchange reserves drops to less than $500 billion in the coming months, the central bank may need to consider measures to increase its size, according to Barua. To stabilize the rupee and allow the RBI to restock its reserves, he remarked, “More money is needed at this point.” To promote greater inflows, the RBI enabled banks to raise non-resident deposits in foreign currency at higher costs and let foreign investors purchase local debt with shorter maturities in July.
According to Reuters, which cited HDFC Bank chief economist Abheek Barua, the Reserve Bank of India (RBI) is expected to find ways to replenish its foreign exchange reserves, such as encouraging non-resident Indians to deposit more funds, in order to stabilize a depreciating rupee. Analysts claim that these actions have only had a small positive impact. When the U.S. Federal Reserve announced intentions to cut its bond purchases in 2013, the rupee was under pressure. It may be time for the central bank to consider other methods. According to Barua, it might be time to once more pull out the taper tantrum playbook, subsidize forwards, and deposit lumpy non-resident funds. The strong foundations of India are important to NRIs, who may be convinced to deposit their dollars there at competitive rates.
