India Economic Watch
Some relief, may be, but FX
reserves really the key
Bottom line: Rebuilding FX reserves key to INR stability
We welcome yesterday’s initiatives to provide RBI swaps to fund oil imports and
seek swap lines against trade arrangements as short-term relief. Yet, to stabilize
INR expectations, we believe that the Reserve Bank of India (RBI) will have to
take far more pro-active steps to rebuild FX reserves to make up for not buying
FX in 2H09-1H11. It is for this reason we believe in the urgency of launching a
scheme to attract chunky FX inflows where the INR risk would be borne by the
RBI or the fisc to comfort investor confidence: NRI or sovereign bonds or reviving
FCNRA deposits. After all, India's import cover has halved to seven months - last
seen in 1998 - in the past five years, below the eight to ten months needed for
INR stability. We ourselves estimate that the RBI would be hard pressed to sell
US$25bn, and every US Dollar sold will likely only raise further questions about
the adequacy of FX reserves. Do read our last Rupee Dilemma report here.
RBI swap lines for oil cos, swap lines with trading partners
RBI to offer swaps to fund oil imports. The RBI has just introduced swaps to
meet the entire daily USD requirements of three public sector oil marketing
companies (IOC, HPCL and BPCL). Needless to say, the scope of this initiative is
limited by the increasing inadequate size of FX reserves. Under this facility, the
RBI will undertake sell/buy USD-INR forex swaps for fixed tenor with them
through a designated bank. This gets operationalized with immediate effect and
will remain in place until further notice.
Swap lines with trading partners. The government has set up a panel to
explore the possibility of using local currency for trade with major trading partners.
The purpose is limited to examining swap of national currency for trade which is
distinct from currency swap agreements of central banks.
RBI needs to raise FX to intervene credibly
We continue to emphasize our belief that the RBI will have to take far more proactive steps to rebuild FX reserves to make up for not buying FX in 2H09-1H11.
After all, India's import cover has halved to seven months - last seen in 1998 - in
the past five years, well below the eight to ten months needed for INR stability.
India’s BoP indicators are now trailing BRIC levels (Table 1). We estimate that the
RBI would be hard pressed to sell US$25bn, and even then, every US Dollar sold
will likely only raise further questions about the adequacy of FX reserves. Do read
our how-much-can-RBI-sell report here.
We agree with Delhi and the RBI that the INR collapse is likely overdone.
Although, INR expectations are racing to Rs70/USD (and now, even Rs75/USD),
our own fair value is Rs51.1/USD. It is for this reason we believe in the urgency of
launching a scheme to attract chunky FX inflows where the INR risk would be
borne by the RBI or the fisc to comfort investor confidence: NRI or sovereign
��
Some relief, may be, but FX
reserves really the key
Bottom line: Rebuilding FX reserves key to INR stability
We welcome yesterday’s initiatives to provide RBI swaps to fund oil imports and
seek swap lines against trade arrangements as short-term relief. Yet, to stabilize
INR expectations, we believe that the Reserve Bank of India (RBI) will have to
take far more pro-active steps to rebuild FX reserves to make up for not buying
FX in 2H09-1H11. It is for this reason we believe in the urgency of launching a
scheme to attract chunky FX inflows where the INR risk would be borne by the
RBI or the fisc to comfort investor confidence: NRI or sovereign bonds or reviving
FCNRA deposits. After all, India's import cover has halved to seven months - last
seen in 1998 - in the past five years, below the eight to ten months needed for
INR stability. We ourselves estimate that the RBI would be hard pressed to sell
US$25bn, and every US Dollar sold will likely only raise further questions about
the adequacy of FX reserves. Do read our last Rupee Dilemma report here.
RBI swap lines for oil cos, swap lines with trading partners
RBI to offer swaps to fund oil imports. The RBI has just introduced swaps to
meet the entire daily USD requirements of three public sector oil marketing
companies (IOC, HPCL and BPCL). Needless to say, the scope of this initiative is
limited by the increasing inadequate size of FX reserves. Under this facility, the
RBI will undertake sell/buy USD-INR forex swaps for fixed tenor with them
through a designated bank. This gets operationalized with immediate effect and
will remain in place until further notice.
Swap lines with trading partners. The government has set up a panel to
explore the possibility of using local currency for trade with major trading partners.
The purpose is limited to examining swap of national currency for trade which is
distinct from currency swap agreements of central banks.
RBI needs to raise FX to intervene credibly
We continue to emphasize our belief that the RBI will have to take far more proactive steps to rebuild FX reserves to make up for not buying FX in 2H09-1H11.
After all, India's import cover has halved to seven months - last seen in 1998 - in
the past five years, well below the eight to ten months needed for INR stability.
India’s BoP indicators are now trailing BRIC levels (Table 1). We estimate that the
RBI would be hard pressed to sell US$25bn, and even then, every US Dollar sold
will likely only raise further questions about the adequacy of FX reserves. Do read
our how-much-can-RBI-sell report here.
We agree with Delhi and the RBI that the INR collapse is likely overdone.
Although, INR expectations are racing to Rs70/USD (and now, even Rs75/USD),
our own fair value is Rs51.1/USD. It is for this reason we believe in the urgency of
launching a scheme to attract chunky FX inflows where the INR risk would be
borne by the RBI or the fisc to comfort investor confidence: NRI or sovereign
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