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 Reserve Bank of India Gov. Raghuram Rajan is reviewing its exchange
rate policy, three officials with knowledge of the matter said,
after the rupee's drop to a record low in August spurred criticism
that it was ill-prepared to manage a heavy sell-down by foreign
investors.
The RBI is determined not to let that happen again, and is taking
advantage of a rupee recovery on a flood of overseas money betting
that opposition leader Narendra Modi's Bharatiya Janata Party would
sweep to power and set the stage for a revival in Asia's
third-largest economy.
The BJP scored a resounding victory in vote counting on Friday,
knocking the Congress party out of power after a decade.
"In 2009, 2010, there was this great hands-off approach. But now we
are thinking of reserve accretion," said an official aware of the
RBI's approach.
"We need to prepare ourselves against any kind of storm that is
going to come up," he added.
The three officials declined to be identified because they were not
authorized to speak with the news media.
While buying up dollars gives comfort against the prospect of a
future sell-down, it can add to inflationary pressure by boosting
rupee liquidity, and the RBI's push to build reserves is tempered by
its deep-seated wariness of inflation, the officials said.
A potential flood of rupees into banks as a result of RBI
dollar-buying may thus force it to "sterilize" excess rupees,
removing them from circulation by selling bonds, they said.
However, the key plank of its foreign exchange management plan is to
buy dollars whenever possible to build reserves, with no specific
target on how much it wants, the officials said.
"RBI has learnt its lessons. In the current situation where there
are so many uncertainties like elections, global spillover, Fed fund
rate hike, no amount of reserves is high," one of the officials
said.
Traders say the RBI tends to buy dollars when the rupee strengthens
above 60 per dollar. J.P. Morgan estimates that RBI purchases since
February have totaled nearly $20 billion, including $4.1 billion in
May.
As a result, India's dollar reserves surged to $313.8 billion as of
May 9, the highest since November 2011, from a more than three-year
low of $274.8 billion in September, when the RBI defended the rupee
aggressively by selling dollars, according to RBI data.
The RBI does not officially target a level for the rupee, but does
step into the market to smooth volatility.
"The RBI maintains a foreign exchange reserve buffer that is
commensurate with the needs of the Indian economy," the central bank
said in an emailed response to a query by Reuters.
RUPEE REVIEW
Meanwhile, an RBI committee is reviewing measures rolled out last
year to stabilize the rupee, according to one of the officials.
Those steps included currency swap concessions for banks raising
money from abroad and a special dollar window to state oil
companies.
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The measures, along with finance ministry steps such as curbing gold
imports, were widely credited with stopping the rupee rout.
Rajan, who took office at the central bank on September 4, wants a
list of options ready in the event that the rupee comes under
pressure again, the person said.
Traders believe that in the event of another sell-down, the RBI
would re-introduce curbs on trading on leverage. They also say it
could take unprecedented steps such as intervening in
non-deliverable forwards markets overseas through state banks.
FRAGILE NO LONGER?
The rupee has surged 18 percent since hitting a record low of 68.85
in August, far outperforming other emerging market currencies such
as the Brazilian real and Indonesian rupiah.
The RBI is also wary of a sharp appreciation in the rupee, which
might render the exchange rate less competitive for exporters, one
of the officials said.
India's import cover - the amount of imports covered by reserves -
stands at eight months, according to Bank of America-Merrill Lynch.
That is the highest since October 2011 and up from about six months
in the midst of the rupee crisis.
Dollar purchases have the added benefit of capping gains in the
rupee, which the RBI sees as too strong in real effective exchange
rate terms and not properly reflective of India's high inflation,
the officials said.
David Loevinger, managing director of emerging markets at Los
Angeles-based investment manager TCW Group, said the RBI does not
need to add much more to its reserves.
India's once-wide current account deficit has narrowed since the
government imposed curbs on gold imports last year, and its reserves
are now about 1.7 times its deficit and external debt due in a year
or less, he said.
By that measure, India now has the highest foreign exchange reserve
cover among the group of countries including Brazil, Indonesia,
South Africa and Turkey known last year as the Fragile Five.
"It's like buying insurance. You want to buy only that much
insurance that will be required during emergencies. Otherwise you
will end up paying an unnecessarily big premium," Loevinger said.
(Editing by Rafael Nam, Tony Munroe and Chris Gallagher)
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