The rupee descent to successive record lows pits RBI against a bearish market

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The Indian rupee’s drop to a series of record lows has fuelled worries of a larger selloff, putting the central bank against experts and strategists who expect greater losses.

The rupture of the rupee in a series of declining records causes fears of a deep selloff and puts the bank in the middle with analysts and strategists predicting further losses.

Inflation has already fallen by more than 6 percent this year, putting it at the $ 80 per dollar level for the first time, such as fears of a global economic downturn and rising oil prices. Officials are well aware of the potential dangers, as the State Bank of India and the government announced a number of measures last week to support the currency.

The current downturn brought back memories of a major rupee sale in 2013, a period that also saw an increase in current account deficits and currencies, accelerating inflation and rising US Treasury yields. At the time, inflation was down a few months before the Syrian war caused oil prices to rise and the rupee dropped to 3.9% in one day, the biggest loss in two decades.

A better macro background compared to 2013 is likely to increase the chances of a slight success in these measures to free up capital account and buy RBI time. economists at Citibank Inc. including Samiran Chakraborty in Mumbai have written in a research book. “However, macros need to be upgraded for the RBI to emerge from this policy debate.

Analysts and market metrics are both very aggressive, even after the latest steps. The options on the rupee make the price at a 52% chance that it will weaken to $ 82 per year by the end of the year, which could increase this year’s decline to about 10%, making it the worst year since 2013.

Among the measures in support of the rupee announced on Wednesday, the Bank of India said it was raising corporate lending limits abroad by companies and relaxing foreign patent laws on government bonds to boost foreign exchange earnings. The central bank also said it had intervened to ease the congestion of the dollar in order to ensure better market performance.

 

Delicate Balance

The RBI’s cash flow has already entered its coffers, with foreign investment falling to $ 593 billion in June, from a high of $ 642 billion in September last year. While that is still far below the $ 275 billion level in 2013, it is now down six months from the last eight months.

“India’s sources of foreign trade could be eroded in the event of a decline in inflation,” said Easwar Prasad, a Cornell University professor and senior colleague at Brookings Institution in Ithaca, New York. “The RBI should maintain a strong balance between supporting growth on the one hand, and reducing domestic inflation and inflation on the other.”

Nomura Holdings Inc. predicts revenue will drop to $ 82 per September, while Goldman Sachs Group Inc. and Bank of America Corp. both predict that they will weaken to 81 by the end of the year. The stock gained 0.2% on Thursday to close at 79.1775 after sliding to a new low of 79.37 on Wednesday.

In the midst of unfavourable market metrics, the number of open positions in the dollar-rupee call options easily exceeds those inputs that expire between now and the end of the year. That means more positions will benefit from the reduction of the rupee than those that will benefit from the circle.

No Line in Sand

New Delhi is looking at the changing situation with concern but does not immediately see it as a disaster as there are similar situations in emerging markets, a finance ministry official told Bloomberg last week. The government does not have a specific line in the rupee sand in the mind, said the man, who requested anonymity.

The central bank also adheres to its principle that it does not look at a certain level, but only intervenes to correct the volatile situation.

At least there is one gauge that shows that the rupee remains expensive even after its recent decline – mainly because its losses this year have been smaller than many of its peers.

The effective exchange rate of the rupee compared to the basket of currencies for 40 Indian trading partners was 104.90 at the end of May, above the 100-year-old limit which is considered fair value, according to the RBI index.

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