Also Read: What more can India do to support the rupee?
Here are top ten developments:
1. The RBI is estimated to have sold $400-$500 million worth in spot, though possibly some of that was also in forward markets, dealers say. The USD/INR rebounds to 53.88/89 to the dollar, after being pulled down to as low as 53.50 from its intraday high of 54.15.
2. The rupee opened lower on Tuesday, breaching the 54 mark and coming within striking distance of its all-time low of 54.3 to the dollar. The rupee opened at 54.05 against the dollar but pulled back almost immediately to 53.75 on heavy selling from public sector banks. There was some export selling of dollars as well on expectations that the Reserve Bank of India would defend the 54 level.
3. The Reserve Bank of India's recent fight to defend the rupee has had muted success, with the currency hitting a record closing low on Monday despite several administrative measures as well as selling of dollars in the market by the central bank. The rupee has lost nearly 9 per cent in value since the start of March and is expected to remain under pressure amid global risk aversion and worry about India's large current account and fiscal deficits and sluggish policymaking by the government.
4. The Indian rupee is one of the weakest currencies in Asia and among emerging markets. This is largely because India is a net importer of goods and services and hence has a high current account deficit. In comparison, other Asian economies like Singapore, South Korea, Taiwan and Malaysia are net exporters and maintain a current account surplus. A current account deficit occurs when a country imports more goods and services than exports.
5. The RBI could open a dollar window for oil companies to sell rupees and buy dollars from the central bank. This would reduce volatility in the rupee by enabling oil companies to directly source a large part of their dollar requirement instead of buying large chunks from the market. The RBI could sell the dollars to oil importers at its daily reference rate. However, that could severely strain India's reserves given the country's large oil import bill.
Also Read: Defending rupee: Is RBI fighting a losing battle?
6. The RBI could conduct special market operations for oil companies, holding auctions to buy oil bonds and giving the oil companies foreign exchange at market rates. However, dealers say the outstanding amount of oil bonds is too small to lead to significant rise in dollar supply. The RBI opened such a dollar window for oil companies in 2008 and discontinued it in 2009.
7. The government could issue a sovereign-guaranteed bond through State Bank of India to non-resident Indians at attractive interest rates, similar to the Indian Millennium Deposits issued in 2000, when the bank attracted around $7 billion for a $5 billion issue. However, such a move could increase the country's debt and interest liability.
8. India could issue sovereign bonds to raise dollars from overseas investors. However, the RBI is wary of the government issuing bonds directly as it exposes the country to foreign exchange risk during repayment. One option would be to sell a dollar bond repayable in rupees. The Philippines was the first country in Asia to sell dollar bonds abroad to be repaid in its local currency in September 2010.
9. The RBI can attempt to persuade banks and finance companies to raise funds in dollars abroad and bring them back to India to lend locally. Many banks have an ongoing forex bond issue programme, and the rupee's decline can make it attractive to raise dollars and convert them into rupees even after accounting for the hedging cost given the fall in forward dollar rates.
10. The central bank could issue rules to effect a delay in import payments, which typically are made at the end of every month. The bunched-up outflows put pressure on the rupee, and the RBI could look at asking for staggered payments.
With inputs from Thomson Reuters 2012