What can RBI do to prevent Rupee fall?
Rupee is now at the door of the set short term target of 56-57 (low of 55.87). There should be genuine dollar supplies at 55.95-56.20 considering 57.00-57.25 attractive to sell August 2012 dollars. Exporters have been realising higher export receivables by selling 3M dollars first at 55.00-55.20; then at 56.00-56.20 and now prepared to sell at 57.00-57.20. It is not because we have seen the “low” for the rupee but in anticipation of sharp gains in rupee into 52-53 considered as fair value. So, the objective is to realise higher gains unmindful of opportunity loss. It is not prudent to wait for the head or the tail of the move....locking 60-80% (of end-to-end move) is considered sensible given the market volatility.
Now, it is not fair to expect the Government to come to the rescue of the rupee. They could do very little at this stage. All stake holders look up to RBI to provide relief. It is not that RBI is quiet; all possible measures are being rolled-out, unfortunately the measures could only reduce the pace of movement from bad to worse.
It is time for RBI to take the “ultimate weapon” by announcing sovereign bond issuance to the tune of not less than $20 billion; keep selling dollars in the market to take out excessive “long dollar” positions in the market and announce Rs.1 Trillion of OMO bond purchases to absorb resultant rupee liquidity squeeze in the system.
What’s the impact on the market?
· RBI will have USD liability in its books at cost say 6.0-6.5% for 3-5 year tenor
· RBI will add to rupee assets at yield 8.25-8.5% for 3-5 year tenor
· USD/INR will sharply gain to 53.50 and get into consolidation mode at 52-53 considered as fair value factoring in extended dollar rally against global currencies
· 10Y Bond yield to settle around 8.20-8.35%; considered affordable borrowing cost for the Government
· Open up expectation of rate cut for shift into aggressive growth supportive monetary stance
I don’t see any other option at this stage to save rupee and to get positive vibes into the economy and markets. The end result is not important at this stage; the first aggressive step to prepare for soft-landing is important and critical. Will RBI act? It is crisis situation and it is time to act strong and hard. Let us see how things unfold.
Moses Harding
sir
ReplyDeleteI feel if Government announces , tax cuts for fresh investments in stock market (mainly short term capital gains ) for USD bought into india for investment in stock exchange , i think we may very well adjust the rupee slide and not only slide , it may also improve.
but your idea seems very practical , RBI is quicker than GOI and it avoids tax anomolies also
Great work sir
It is too much to expect from the Government given their mood to implement GAAR. I dont see opening a dollar supply window for oil PSUs as an effective solution. RBI can do that any way discreetly with oil PSUs. This action will result in supplying dollars at subsidised rate which will pull demand for forward dollars and FII's exit. 20 billion USD bond issuance and 1 trillion OMO will provide stability in rupee around 51, 10Y bond yield around 8.25% and drive NIFTY into 5600. Is itn't a happy feeling. This is waht investors expect.
Deletesir ,
ReplyDeletepreviously we were having so much of forex restrictions esp for outward remittances , if we return to such things , whether can we expect ruppee to cool down ,
of course i know it is not practical , but excessive restrictions on usage of forex , can it help in achieving appreciation of ruppee
sir i am asking to learn from you , i full accept the bond issuance followed by open market operation will definitely bring in more inflows by bonmd issue and market liquidity reestablished by OMO.