MUMBAI (Reuters) – The Reserve Bank of India may need to find ways to replenish its foreign exchange reserves such as encouraging non-resident Indians to deposit more funds, as it looks to stabilise a depreciating rupee, HDFC Bank Chief Economist Abheek Barua said.
The Indian currency has weakened 9.5% so far this year, with the central bank defending the rupee via dollar sales that have depleted its forex reserves to $545 billion from the peak of $642 billion a year ago.
“The central bank should intervene to ensure that a falling currency does not eclipse India’s fundamentals,” Barua wrote in a note this week.
While there might be some benefits of a depreciated currency in closing the trade gap, the damage to the capital account in terms of reduced confidence of investors will outweigh this benefit, he said.
According to Barua, the central bank may need to think of ways to bulk up its forex reserves, should the pool shrink to near $500 billion in the coming months.
“More capital is needed at this stage to stabilise the rupee and enable the RBI to replenish its reserves chest,” he said.
In July, the RBI had allowed banks to raise foreign currency non-resident deposits at higher costs and permitted foreign investors to buy shorter term local debt as a way to encourage more inflows.
Those measures have only helped marginally, analysts say.
It may be time for the central bank to ready other options such as those in 2013 when the rupee came under pressure due to the U.S. Federal Reserve announcing plans to taper bond purchases.
It may be time to think yet again of the taper tantrum playbook, subsidize forwards and get lumpy non-resident deposits in, Barua said.
“NRIs are sensitive to India’s robust fundamentals and could be persuaded to deposit their dollars in India at attractive rates,” he added.
(Reporting by Anushka Trivedi in Mumbai)
