The Reserve Bank of India (RBI) will avoid intervening in the foreign-exchange market for the 11th consecutive month, as the relative strength of the rupee, Asia’s second best-performer in September, helps curb inflation.
RBI will refrain from attempts to influence the exchange rate in October even as the currency’s 4.7 per cent surge against the dollar erodes earnings for exporters. Standard Chartered Plc said policy makers might take steps to reduce swings in the currency.
RBI Governor Duvvuri Subbarao is focusing on cooling inflation in the nation. India’s foreign-currency reserves rose 0.4 per cent in the past year, the least among Asia’s 10 biggest economies, as measures to limit currency gains boosted China’s holdings by 15 per cent, Japan’s two per cent, Taiwan’s 14 per cent and South Korea’s 16 per cent.
“RBI is unlikely to intercept the rupee as that would boost money supply and aggravate inflationary pressures,” Andy Ji, senior currency strategist in Singapore at Royal Bank of Scotland Plc, the world’s fifth-biggest currency trader, said in a September 30 interview. “Exports are relatively a small part of India’s economy and hence, a lesser policy concern.” Exports of goods make up less than 20 per cent of gross domestic product, compared with about 60 per cent in South Korea and 30 per cent in Indonesia. Annual growth in overseas sales slowed to 22.5 per cent in August, from 54 per cent in March, a government report showed on October 1.
Smoothing volatility
The rupee touched a five-month high of Rs 44.5 a dollar on October 1, after RBI data showed capital inflows more than offset a record current-account deficit in the first quarter of this financial year. The capital account showed a surplus of $17.5 billion in the three months through June, compared with a shortfall of $13.7 billion in the current account, RBI said in a September 30 report.
The last time the rupee appreciated as much as in September was May 2009, when it jumped 6.4 per cent. The central bank sold the equivalent of more than $1 billion in rupees the following month, the most since August 2008. RBI intervenes in the market “only to smooth volatility, which is harmful to trade and investment,” Subbarao said in Washington on April 26. Alpana Killawala, a spokeswoman for the central bank in Mumbai, declined to comment on October 1.
‘Currency war’
Japan intervened for the first time since 2004, selling 2.12 trillion yen ($25 billion) from August 28 through September 28, the Ministry of Finance said in Tokyo on September 30. Brazil’s Finance Minister Guido Mantega warned last week of a global “currency war” as his government weighs a higher tax on capital inflows. Thai Finance Minister Korn Chatikavanij said on September 17 rising currency reserves indicate the central bank has been buying dollars.
India’s foreign-currency reserves were $264.5 billion as of September 24, while its total external debt was $273 billion at the end of June, according to central bank data. China’s reserves totaled $2.45 trillion as of June 30 while that of Japan measured $1.01 trillion at the end of August.
RBI has kept out of the currency market even as its own trade-weighted index for the rupee against a basket of 36 currencies has risen above 100 since April, signaling overvaluation, according to data on its website. The so-called real effective exchange rate index was 100.87 in July.
Gains ‘still modest’
The rupee lagged behind the 5.1 per cent gain in the South Korean won in September and its 4.3 per cent advance this year ranks sixth among Asia’s 10 most-traded currencies.
“The rupee’s gains so far in 2010 still look modest when compared to other Asian currencies, and so, policy makers probably don’t have much reason for concern yet,” Priyanka Chakravarty, a Mumbai-based foreign-exchange strategist at Standard Chartered, the UK bank that earns most of its profit from emerging markets, said in a September 30 interview. “They may still act to reduce market volatility after the recent sharp movements.”
The rupee’s so-called relative strength index, a technical indicator based on trading patterns, surged on October 1 to a one- year high of 82 from 38.5 on August 31. Readings above 70 indicate a currency may have risen too fast and is poised for a reversal.
Risk reversal
Implied volatility on one-month dollar-rupee options has jumped to 8.6 per cent from a five-month low of 7.3 per cent reached September 13. The gauge of expected swings in exchange rates, quoted by traders as part of option prices, is below the 11.2 per cent average the past three years.
One-month options granting the right to sell the rupee against the dollar cost 0.7 percentage point more than contracts that allow purchases at the end of last week, up from a 16-month low of 0.31 points reached on September 20.
The rupee’s so-called one-month 25-delta risk- reversal rate, which peaked this year in May at six percentage points, is still lower than 2.7 points for Brazil’s real and 1.5 points for Russia’s ruble.
The rupee has rallied as overseas investors added a net $18.9 billion to holdings of stocks and $10 billion to holdings of local debt this year, Securities and Exchange Board of India data show.
Yield difference
Local-currency government bonds due in 10 years yield 7.91 per cent in India, compared with 11.95 per cent in Brazil, 7.7 per cent in Russia and 3.32 per cent in China. The difference in yields between Indian debt due in a decade and similar-maturity US Treasuries widened to 5.39 percentage points on October 1 from 3.75 percentage point at the end of 2009.
The yield on the benchmark 7.8 per cent note due May 2020 climbed 6 basis points, or 0.06 percentage point, on October 1, the most in almost three weeks, as India raised Rs 11,000 crore selling bonds maturing in 2015, 2022 and 2027.
India sold Rs 4,000 crore ($898 million) of 7.17 per cent, five-year notes at a maximum yield of 7.74 per cent, according to the central bank. It auctioned Rs 4,000 crore of 8.08 per cent, 12-year debt at as much as 8.04 per cent. The government also sold Rs 3,000 crore of 8.26 per cent, 17-year securities at 8.3 per cent.
