After largely holding out on their own, dollar strength has begun to weigh on the Asia ex Japan currencies, with the Chinese yuan also joined the depreciating milieu. The Indian rupee fell to a record low yesterday, past 77.40 vs the US$ (-0.7%), on a confluence of unfavourable catalysts. Besides a rallying dollar, slowdown worries plaguing US equities (more overnight), Brent average of above US$100 and broader risk-off take sentiments depressed the Indian currency, after brief support from deal specific dollar flows. The rupee had found some relief last week as the RBI’s surprise hike underscored their urgency to normalise policy. Yet portfolio outflows persist – USD1.4bn from equities month-to-date, besides USD0.4bn from debt. The central bank reportedly intervened in the spot and forwards yesterday to stabilise the unit but are unlikely to reverse rupee’s course.
Authorities have the firepower to defend rupee's fall with total foreign reserves at USD597bn in the week of 29 Apr. Net long RBI’s forward FX book stood at USD49bn (by end-Feb22), with more than four-fifth under the 3M to 1Y maturity bucket. The current reserves stock is down 7% from a record high in Sep21 (intervention and valuation effects) but still fares well on external vulnerability metrics, including import coverage and short-term debt obligations. The negative terms of trade shock from high commodity prices (wider current account shortfall) and slowing capital flows this year makes a case for gradual depreciation in the currency as an adjusting mechanism (outlined in India: BOP, liquidity, and new equilibrium). The central bank's focus will be on facilitating this shift in a non-disruptive manner and in step with the regional action.
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