A limited period of Rupee depreciation might be a better way to wade through the current period of turbulence in the forex market, according to the State Bank of India’s Economic Research Department (ERD).

The Rupee is fast moving towards 82 to the Dollar mark amid three successive jumbo-sized 75 basis points rate hikes by the US Fed, with indications of more to come. It tested an intraday low of 81.9550 in intraday trades so far on Wednesday.

Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said, “Even as the Dollar Index has surged by 17.1 per cent since the Russia-Ukraine war broke out in late February, the Rupee has only depreciated by 7.8 per cent, indicating the RBI has been leaning against the wind in terms of managing the currency, and it may pay off now with a little bit of leaning with the wind, though only to an extent.”

What the report says

In the Ecowrap report, SBI’s ERD team observed that the Indian markets have performed much better. Specifically, the Rupee has been holding remarkably well with RBI intervention supporting the market. This is in sharp contrast to the 2013 taper tantrum crisis when the Rupee witnessed significant volatility for a prolonged stretch of time, as per the report.

The team noted that Non-Deliverable Forward (NDF) market for three-month tenure shows that three months forward rate for USD/INR pair is now over ₹82 per dollar.

Ghosh said, “Interestingly, the NDF market had factored a breach of ₹80 barriers from August. The implied yield on INR in the NDF is currently in the range of 4.25 per cent. The yield is steadily rising from mid-August implying depreciation pressure on the rupee going forward. We believe a limited period of rupee depreciation might be a better way to wade through the current period of turbulence.”

Separately, there is no simple rule to augment capital flows by the RBI in the current scenario, the ERD said.

“One possibility in the context of recent efforts by RBI to settle trade transactions in a non-dollar currency like Rouble is that if Central Banks come together and agree to peg the currency pair RUB/INR (make it agnostic to exchange fluctuation). In principle, exchange rate fluctuation has to be accounted for by the RBI to make the scheme successful,” the report said.

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