RBI may give rupee a freer rein after India makes it to US currency manipulator list

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.

business Updated: Apr 16, 2018 13:50 IST
India increased its purchases of foreign currency last year and has a “significant” trade surplus with the US.(Scott Eells/Bloomberg)

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:

Less Intervention

Craig Chan, global head of EM currency strategy at Nomura Holdings Inc.:

  • It’s possible Indian authorities will feel more pressure to refrain from intervening to stem gains in the rupee when it starts strengthening
  • India does have one of the strongest FX reserve positions in the region

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd.:

  • There’s very little chance of India being named as a manipulator in the future, given that it runs persistent current-account deficits, Goh writes in note
  • 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

Fleeting Appearance

Divya Devesh, Asia FX strategist at Standard Chartered Plc:

  • Given India’s persistent current-account deficit and slight INR overvaluation, the risk of India being named a currency manipulator in the future remains extremely low

India will likely drop off the monitoring list in the coming year, given a probable widening of the current-account shortfall and more modest capital inflows reducing reserves accumulation

  • Frances Cheung, head of Asia macro strategy at Westpac Banking Corp:

Being on the U.S. watchlist may not exert a significant impact on the rupee, apart from an initial reaction

  • 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.
  • The US Treasury said in its report that the INR isn’t deemed undervalued by the International Monetary Fund

— With assistance by Lilian Karunungan, Subhadip Sircar, and Yumi Teso