Mumbai :India’s addition to the US Treasury’s monitoring list for currency manipulation makes it more likely the Reserve Bank of India (RBI) will give freer rein to the rupee when it rises against the dollar, analysts say.
India increased its purchases of foreign currency last year and has a “significant” trade surplus with the US, the Treasury noted in its semi-annual report on foreign-exchange practices released in Washington on Friday. The rupee has been the second-worst performing Asian currency this year, dropping 2.3% against the dollar, after strengthening 6.4% in 2017.
Here’s what analysts made of India’s addition to the US Treasury’s FX watchlist:
While the RBI is unlikely to cease FX intervention activity entirely, it will likely scale back the amount to move below the 2% of GDP threshold, he says in interview; that means average net FX purchases will have to stay below $4b a month
When portfolio inflows pick up, the INR could strengthen more, and at times when the rupee comes under pressure, the central bank may limiting the extent of its weakness by utilizing some of the reserves, Goh says in interview
Heng Koon How, head of markets strategy, and Alvin Liew, senior economist, at United Overseas Bank Ltd.:
With this attention from the U.S. Treasury, the probability of INR strength going forward is even less, Heng and Liew write in note; rising oil prices could cause India’s current-account deficit to widen as the nation imports most of its energy needs
The RBI’s forward book has fallen back since last September and it’s highly unlikely that India will meet the second criteria – a current-account surplus – anytime soon.
