 "Monetary policy: Rupee reverses initial gains on concern over RBI moves")
The rupee appreciated sharply on Friday after the Reserve Bank of India (RBI) cut the cash reserve ratio (CRR) by 50 basis points (bps) and hiked interest rates ceiling on fresh FCNR (B) deposits raised by banks.
However, the domestic currency reversed its initial gains due to concerns on potential benefits. If banks significantly increase deposit rates, the challenge lies in deploying these high-cost funds effectively. Consequently, inflows may remain subdued, as bank boards might be hesitant to raise rates to such levels, said dealers.
The rupee appreciated up to 84.53 per dollar during the day on Friday, before settling at 84.70. The local currency had settled at 84.73 per dollar on Thursday.
The RBI has raised the cap on FCNR deposit rates for the 1-3 year tenor from AAR + 200 bps to AAR + 400 bps, effective until March 2025, to encourage foreign currency inflows.
“The RBI’s decision to raise the FCNR ceiling shows an open acknowledgment that capital flows are not coming to the market as expected. The practical implications are different,” said a treasury head at a private bank.
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At the post-monetary policy press conference, deputy governor Michael Patra said that uncertainties, such as the upcoming administration change in the US and the responses of other countries, make it challenging to provide a precise assessment of rupee at this stage. Patra reiterated that the RBI will take action as required based on evolving circumstances. Currently, he stated, there are no concerns, and the measures announced are aimed at facilitating greater inflows and providing investment opportunities for NRIs.
RBI Governor Shaktikanta Das said foreign exchange reserves remain robust despite recent depletion, much of which is attributed to valuation losses. He said that the reserves are more than adequate, and the RBI remains confident in the ability to manage any potential spillovers effectively.
As of the week ending November 29, India’s foreign exchange reserves stood at $658 billion, with addition of $1.5 billion during the week. Analysts said that the total reserves increased on the back of revaluation. Foreign currency assets increased by $2 billion during the week.
Addressing concerns about potential tariffs following administrative changes in the US, Patra said that any such tariffs, if implemented, would not occur in isolation. He highlighted the possibility of broader reactions, such as China potentially devaluing its currency or imposing retaliatory tariffs. Given these interconnected developments, he emphasised that it is challenging to predict unilateral actions or their isolated impacts at this stage, suggesting the need to wait for a clearer general equilibrium to emerge.
Meanwhile, the yield on the benchmark 10-year government bond hardened by 7 bps to 6.75 per cent, against previous close of 6.68 per cent after the domestic rate-setting panel kept the repo rate unchanged at 6.50 per cent.
“A segment was expecting rate cut in this policy itself, which led to the rise in yields,” said Vikas Goel, managing director and chief executive officer of PNB Gilts. “I see the yield moving in the current range of 6.68 per cent to 6.75 per cent,” he added.