Taper tantrum playbook key for RBI as rupee continues slide to record lows

The rupee has declined almost 7% this year, bringing back memories of the selloff nearly a decade ago, when fiscal and current account deficits also widened

With rupee sliding to fresh record lows almost every week, analysts say India’s policy makers can take a leaf from their 2013 taper tantrum playbook to curb further losses. 
 

The currency has declined almost 7% this year, bringing back memories of the selloff nearly a decade ago, when fiscal and current account deficits also widened, inflation accelerated and US Treasury yields rose. 

There are indications that authorities are heeding the lessons, having already raised import duties on gold and announced measures to attract more foreign inflows. The Reserve Bank of India also said it plans to settle international trade in the local currency, and has close to $600 billion of foreign-exchange reserves, which it has been deploying to protect the rupee. 

Here are some of the measures that can be activated: 

Forex swap window for oil companies
 

The RBI has the option to bring back a forex swap window for state-run oil companies to meet their dollar demand, said Aastha Gudwani, India economist at BofA Securities. The move proved to be very effective in 2013 in curbing dollar demand as oil companies are among the biggest greenback buyers.

Interest-rate defense
 

Although drastic rate hikes of 2013 aren’t expected, “a certain minimum amount of interest differential ought to be maintained between the repo rate and Fed Funds rate,” according to Kaushik Das, chief India economist at Deutsche Bank, who expects another 160 basis points of hikes on top of the 90 points since May. 

Raising dollar funds
 

State-run firms may be allowed to raise additional dollar funds through quasi-sovereign bonds. The RBI has already doubled the amount companies can raise via overseas borrowing to $1.5 billion.

Fast-track bond inclusion
 

A fast-tracked plan for inclusion in the global bond indexes may help and bring in foreign inflows. 

Curbing speculation
 

The currency futures market has grown in volumes, giving the central bank a strong intervention tool to curb speculation. The RBI in 2013 barred banks from doing proprietary trading in currency futures and options and also clamped down on the trading positions by cutting the limits.

Capital outflow curbs
 

It can put curbs on overseas direct investments by domestic companies as well as remittances by individuals, depending on the intensity of rupee depreciation, said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd.