India’s foreign-exchange reserves have surpassed $700 billion, serving as a strong deterrent against speculative actions and enabling the Reserve Bank of India to intervene effectively for rupee stabilization, as per a recent report by SBI Research. These reserves, equivalent to over 10 months of imports, coupled with short-term debt below 20% of reserves, offer flexibility and time for market interventions to support the rupee when necessary.
Despite the robust reserve position, SBI Research highlighted concerns regarding volatile capital flows and high oil prices, posing risks in the near term. The report recommended specific policy measures, such as establishing a special dollar window for oil marketing companies to address daily demand ranging from $250 to $300 million, aiming to enhance transparency in foreign exchange dynamics and assess the effectiveness of regulatory interventions.
The Committee on Capital Account Convertibility noted that India’s current forex reserves exceed the recommended level of at least six months of imports, but highlighted that short-term debt and portfolio stock surpass the ideal threshold of not exceeding 60% of reserves. Additionally, the report proposed imposing a $100 million limit on trading books exclusively, rather than at the bank book level, to mitigate operational complexities.
Advocating for an ‘Operation Twist’ strategy to elevate short-term yields while reducing long-term yields, the report emphasized the importance of maintaining reference rates within specified limits aligned with policy rates. While acknowledging the Central Bank’s efforts to support the rupee, the research firm urged expedited interventions by sourcing currencies from external markets and introducing alternative mechanisms like a special USD window for OMCs, given the rupee’s depreciation surpasses the country’s macro fundamentals significantly.
