In what feels like chucking pails of water at a forest fire, the RBI has been selling dollars in the spot market to support the rupee. As has now been reported, the Central Bank’s average daily short position in the NDF or non-deliverable forwards market is at approximately 2 billion dollars. Between September and October, its total short foreign currency positions in forwards and futures jumped three times to over 49 billion dollars. By some estimates that figure could soon ratchet up to between 90 to 100 billion dollars.
The NDF market is generally used as the first line of defence when there is currency risk, to build hedges against a sharp knock. And sharp knocks have been coming. The rupee has been consistently hitting “new” all-time lows, even as bearish bets on the Indian currency rise. The Reserve Bank has been trying to counter some of that heat with aggressive moves in the NDF market, hoping to step in and both curb and cap volatility through every trading session. It is a tricky lever though because it has only limited capacity; while the Central Bank can, in theory, build an unlimited position, it will bump up against the realities of the entire market construct.
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From a stable run in 2023, things have become rather rocky for the Indian rupee this year and the Central Bank is now clearly worried about how the domestic currency is unspooling. It has been hit on the one hand by slacking growth domestically and an apparent “Trump trade” on the other. The unknown remains how foreign Institutional Investors (FIIs) behave. Relentless selling of Indian stocks paused over the last few days only to begin again. As the year has shown us, FII money is a fickle friend; 2024 has seen deep and dramatic outflows through months like May and October this year.
Persistent problem
On growth, it has become difficult for the government to deny that there is a clear and present problem. And the weakness we’re currently witnessing in the domestic currency is a reflection of that. It doesn’t look like a flash in the pan either. This year, the rupee has lost close to 1.4 per cent. While we can find relative relief in comparing it to falls in other currencies, working from the top of the ladder to the bottom, there is visible nervousness amongst policymakers. The RBI was buying dollars at a brisk pace in the first two months of this year and had to then spend the rest of 2024 actively selling dollars in the NDF.
But it isn’t just the levels the rupee falls to that present a problem.
Shaktikanta Das, the RBI’s former governor during a news conference in Mumbai on December 6, 2024.
| Photo Credit:
Bloomberg
The greater trouble with the rupee is not just how it performs against an economic backdrop but how closely it has been pinned to national sentiment. For all the chest-thumping around national pride and currency levels, the last decade has seen the rupee go from 63 to the US dollar to within kissing distance of the 85 mark. You can put it down to any number of reasons: strength in the US dollar, rising geopolitical risks, volatile and often high crude prices, and unpredictable foreign investor interest. The crux of the matter is that it is now an uncomfortable trophy to flaunt. The Prime Minister has in the past linked the rupee’s fall to corrupt governance and even warned that a falling rupee would lead to other countries taking advantage of India.
This vilification of depreciation in the currency now leaves the Central leadership, the Finance Ministry and the government’s many admirers in an awkward spot. What should a weak rupee now be a barometer of? Corruption, poor economic fundamentals or incompetent financial management?
The global angle
There’s certainly a global angle to this. The dollar index has remained strong at 106 and the rousing support India gave to an incoming Trump administration is now giving way to concern rather than cheer. More and more market watchers believe that the US President-elect will herald a regime of sharp and sweeping trade tariffs, loose fiscal policy, and very little patience for currencies like India’s. Emerging market currencies have seen quarterly knocks the size of which they last witnessed in 2022. Coupled with a potentially unpredictable and impulsive US government at the helm, wobbly growth in emerging markets including India may spell deep losses for the rupee.
If this perfect storm persists, the Central Bank is keenly aware that the domestic currency may fall to lower levels and see much higher volatility. What would that then spell for our rupee patriots? Some have argued that the Central Bank’s war chest of US dollars will come in handy now. RBI data indicates India’s foreign exchange reserves sit at a handsome 658 billion US dollars. The hope is that food inflation may also begin to cool off. Coupled with a potential rate cut from the RBI then, could this be the safety net the rupee needs?
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Perhaps. The problem for the government and its many fervent supporters is that they will have to decide. Is the rupee a barometer of national pride and economic prowess or is it not the shining example we should turn to when discussing the Central government’s many flattering features? The hard truth is also that every successive knock has pushed the threshold of recovery lower and lower for the Indian currency. Which makes it more difficult to defend the obvious.
None of this will be an easy tightrope walk for the newly anointed Central Bank governor—a name decided by the Prime Minister’s office, who replaced former Reserve Bank head Mr Shaktikanta Das in a rather rushed announcement. It seemed like a third extension for Mr Das hung fire till the very last days of his tenure. Ironic as well that there is now talk of a new governor bringing fresh energy to the discourse, given the recent history of “friction” between the government and the RBI around high borrowing costs dampening growth. As benign and non-confrontational as the Central Bank—and the Central Bank governor may be, if there is no recognition of the deep-rooted problems that exist in India’s growth inequity and its increasingly wobbly currency, then we have missed the woods for the trees.
Mitali Mukherjee is Director of the Journalist Programmes at the Reuters Institute for the Study of Journalism, University of Oxford. She is a political economy journalist with more than two decades of experience in TV, print and digital journalism. Mitali has co-founded two start-ups that focussed on civil society and financial literacy and her key areas of interest are gender and climate change.