The Indian rupee will be protected against severe depreciation as the Reserve Bank of India (RBI) still holds high levels of foreign exchange reserves, said CLSA, a brokerage and investment group.
The rupee has been one of the worst performing currencies in Asia, down 4 percent against the dollar. The weak performance has led to many foreign investors exiting the Indian equity market in recent weeks.
"We continue to highlight that RBI Governor Das’s build-up of FX reserves will anchor the rupee during any market sell-off due to Fed tapering/hikes," the CLSA report stated.
While a weak rupee increases the economic stimulus by making exports more attractive, it can also quickly lead to inflation due to the rising prices of imported goods. The RBI can intervene at certain levels to try and anchor the rupee to prevent higher inflation.
The central bank's current foreign exchange reserves stand at over $675 billion. "The RBI’s FX reserves, at US $675 billion (including forwards), are well above our US $600 billion adequate estimate. Reports suggest that the RBI intervened at Rs 76+/USD," CSLA added.
CSLA also estimates the current account deficit to remain within sustainable levels. "We project the current account deficit at a reasonable 1-1.5 percent of GDP in FY22-23, well below the sustainable 2 percent level, with oil prices set to peak off."
The report also highlights that while the RBI is expected to hike rates, which will boost yields, lending rates will not go back to pre-pandemic levels due to weak demand.
a"A saving grace is that we do not see lending rates rising beyond 25bp by September 2022, after a 100bp fall, on weak loan demand (8 percent FY22; 12 percent in FY23 CL). Still, mortgage rates will rise as the differential with the 10-year has narrowed," the report stated.
(Edited by : Shoma Bhattacharjee)
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