Experts believe that RBI will intervene aggressively if there is a huge fall in the rupee. However, capital inflows of $50 billion through FCNR-B and ECB will provide a big cushion against global energy shocks and support the rupee.
Mumbai (Maharashtra) [भारत]July 16 (ANI): The Reserve Bank of India (RBI) is expected to intervene aggressively in the currency markets if the rupee faces extreme pressure towards 98 to 100 levels, according to Anindya Banerjee, Head of Commodity and Currency Research, Kotak Securities. However, short-term capital inflows will provide a large cushion against global energy shocks.
Speaking to ANI on Thursday, Banerjee highlighted that the rupee has already depreciated by about 8-9 per cent since the start of the West Asia conflict, providing substantial relief to domestic exporters, but any further decline in it will directly lead to domestic inflation. “The RBI will be quite aggressive there,” Banerjee said, adding that the central bank is heavily dependent on upcoming, large capital inflows to naturally defend the currency.
Capital inflow of $50 billion will provide support
A key pillar of India’s short-term defense against a widening current account deficit (CAD) will be an estimated USD 50 billion inflow through foreign currency non-resident-bank (FCNR-B) deposits and external commercial borrowings (ECBs), scheduled for August and September. Highly lucrative structured banking products offering attractive returns of 20 to 30 percent on dollar deposits are increasing this momentum.
“An inflow of USD 50 billion in two and a half months can create enough supply of dollars in the system that it can withstand any oil price shock,” Banerjee said, explaining that the inflow effectively covers three to four months of India’s average monthly crude oil import bill of USD 60 to 70 billion.
The surge in oil prices is ‘completely artificial’
Addressing the recent surge in global energy markets – where crude oil has crossed USD 85 per barrel – Banerjee termed the current energy boom as “completely artificial”, as it is neither demand-based nor structurally supply-based. Instead, this instability is driven by significant geopolitical constraints in the Strait of Hormuz, where the flow of tankers recently fell to only 10 percent of their normal capacity. “As long as Hormuz remains completely blocked, oil prices could once again go back to $100,” Banerjee warned. However, he also said that Brent crude will remain in the range of USD 70 to 100 for the next six months, as global economic conditions in Europe and China may not tolerate prices above the triple-digit range.
Although the newly-enacted India-UK trade agreement is a largely long-term positive for foreign direct investment (FDI) and technology transfer, Banerjee stressed an apparent “timing mismatch”, noting that trade agreements take more than two years to translate into concrete currency defenses. As a result, immediate protection against energy supply shocks depends entirely on financial market mechanisms.
Eyes on the Monetary Policy Committee meeting
Looking ahead to the upcoming Monetary Policy Committee (MPC) meeting, Banerjee predicted the RBI to maintain status quo on interest rates, mirroring the US Federal Reserve’s existing “wait-and-watch” stance as the central bank deals with an unpredictable geopolitical landscape. (ANI)
(Except for the headline, this story has not been edited by Asianetnews Editorial staff and is published from a syndicated feed.)