The Indian unit may see some volatility if US central bank hikes rate, but huge reserves will buffer any shock, expert say
The rupee may see some volatility if the US Federal Reserve Open Market Committee (FOMC) in its meeting tomorrow undertakes the widely-expected rate hike.
But India can take heart that the Reserve Bank of India (RBI) is managing its forex reserves well by prudently saving it up for a rainy day.
India's central bank did not have to draw down dollars from its forex reserves to pay off $8.4 billion of Foreign Currency Non- Resident Bank (FCNR-B) deposits that fell due on November 30, 2016. It managed to mop up the dollars from the market, said forex dealers.
The forex reserves fell only by $1.43 billion to $363.9 billion for the week ended December 2. With the exporters bringing in dollars, payments on FCNR (B) deposits went off smoothly, dealers said.
Jamal Mecklai, currency expert and chief executive officer, Mecklai Financial Services, said, "Some volatility may be expected, but it may be noted that the non-deliverable forward markets seem to be booking profits by selling rupee-dollar contracts, which could be one of the reasons why the rupee appreciated last week."
Even the decline of $1.43 billion was mostly due to the central bank having to intervene in the market when the rupee closed at a record low at 68.77 on November 28. The last time the rupee closed lower than this level was on August 28, 2013, when hit a record low of 68.82.
C Venkat Nageswar, deputy managing director, global markets, SBI, told DNA Money, "The forex reserves were managed well by RBI with banks and exporters delivering their dollars on time. But now, the FOMC meeting with the expectation of a rate hike could create some volatility in the market. The end of the year is also tough for the markets as the overseas markets are on a holiday. Traders and speculators are almost absent from the market leading to tightness in dollars."
FOMC meeting is important for the markets as it may not just hike rates but could even give a roadmap for future rate actions. Forex dealers and currency experts expect some volatility in the markets, particularly in December when traders and speculators were almost absent from the market.
Ashutosh Khajuria, executive director, Federal Bank, said, "We have strong forex reserves which could withstand the immediate consequences of a rate hike in the US. I expected the forex reserves to fall by a sharper quantum, considering that the FCNR (B) deposits had to be retired. But RBI has managed it well. They would have mopped up spot dollars and swapped it with forward dollars, which would mature around the same time these deposits mature."
Foreign currency assets, which constitute a significant portion of the overall reserves, fell by $957.9 million to $340.131 billion in the week under review, the data showed. Gold reserves came in at $19.982 billion, down $477.9 million from the previous week.
Post the US elections, the dollar has been appreciating hoping that new president will have industry-friendly regulations in place. The dollar index, which measures the strength of the greenback vis-a-vis a basket of other currencies, has gained nearly 4% since the day of the election, and is currently hovering around at 101.50 level, after having touched a 13-year high of 101.70 on November 24.
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