Explainer: RBI may have defended the rupee at 72, but further fall is inevitable

By Prarthana Mitra

According to the State Bank of India, the rupee may decline further against the dollar, despite what forex dealers are claiming to be a heavy intervention from the Reserve Bank of India to defend it at 71.37, a lifetime low for the currency.

The report published on Tuesday suggests that if the free fall of the rupee continues, RBI may be compelled to adopt “orthodox” monetary policies like inflating interest rates to check depreciation of the domestic currency.

The steady fall of the rupee

Given the “inefficacy” of its sterilised intervention so far, the central bank may have entered the foreign exchange market soon after the new low was reached, mounting a formidable defence of the 72-mark. Traders reportedly said the RBI has likely been selling dollars through private and state-run banks on the anonymous forex platform throughout the day, with the intention to restrict further losses.

After briefly slipping to 72.04 to the dollar early on Friday, the rupee managed to stay above the psychological mark for most of the day, as the central bank aggressively sold dollars whenever the rupee approached 72. This sudden change in RBI’s strategy, may have been timed to coincide with periods when the dollar is soft globally. It looks like the RBI will intervene heavily only when the the other global conditions is stable,” said a forex dealer at a state-run bank, in an interview with the Times of India.

Another senior forex official at a public-sector bank also told TOI, “It seems like they (RBI) have changed their strategy and is determined to not let the rupee fall below the 72 mark just like it was supporting it at 69.”

Fears and recommendations

The alarming fall within half a month, followed by a lukewarm response from the RBI and policymakers to stem the flow, has triggered speculation among traders that the freefall may continue even after breaching new lows, as the rupee hit a record 72.11 on Thursday.

Currencies in several market economies are suffering from the ripples of the US-China tariff war, and is particularly pronounced in India due to the concurrent crude oil price hike.

In the SBI report, experts have also urged the government and RBI to implement Standing Deposit Facility (SDF) without any further delay “as it has no sterilisation cost” and would enable the central bank to absorb unlimited liquidity without any constraint of securities.

Prarthana Mitra is a staff writer at Qrius

currencyIndian RupeeRBISBI