India’s Rupee Defense Raises Question of How Far RBI Will Go

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From Bloomberg reporters Subhadip Sircar and Bhaskar Dutta: The Reserve Bank of India is broadening its defenses to steady the rupee, taking some of its strongest measures since the 2013 taper tantrum. That may give the currency a boost as trading resumes Monday, but the question remains: how far is the central bank willing to go as external pressures mount? The RBI took the steps early Saturday as the rupee again neared a record low. They include opening a dollar window for state-owned oil refiners and introducing a reserve requirement for foreign-exchange derivatives, similar to one used by China’s central bank. The moves come just after the RBI raised interest rates on Wednesday and signaled it was open to further monetary tightening. The rupee is poised to rally when trading resumes Monday, with analysts expecting the RBI to defend the 97-per-dollar level. Sustaining any gains may prove harder, however — oil prices remain stubbornly high, while overseas funds have pulled more than $30 billion from Indian equities this year. The RBI has already taken several steps to bolster its foreign-exchange resources. Its diaspora deposit program raised a record $133 billion, swelling its forex reserves to nearly $800 billion in early September. But the pressure to defend the currency has since drained $51 billion from reserves in the past four weeks. The rupee has weakened 7% this year, the worst performance in Asia. RBI Governor Sanjay Malhotra said it was undervalued on some gauges, and that markets can be irrational in the short term. The currency closed slightly above its record low of 96.9650 per dollar on Friday. The measures build on a series of actions the RBI has taken to support the rupee. Earlier, it limited daily net open positions for banks at $100 million and barred lenders from offering clients non-deliverable rupee contracts, a restriction it later rolled back. In June, the authority unveiled its diaspora deposit program days after New Delhi removed taxes on bond investments by global funds. Read the full story here.