The Reserve Bank of India's recent fight to defend the rupee has had muted success, with the currency hitting a record closing low on Monday despite several administrative measures as well as selling of dollars in the market by the central bank.
Over the last week, the RBI directed exporters to sell half the foreign currency in their accounts and made it easier for the market to absorb large foreign exchange transactions.
The rupee has lost nearly 9% against the dollar since the start of March and is expected to remain under pressure amid global risk aversion and worry about the country's large current account and fiscal deficits and sluggish policymaking by the government.
Foreign exchange reserves have been dwindling and can now pay for just six months of imports, limiting the RBI's ammunition to defend the rupee. It is thus expected to take further administrative measures to prop up the currency.
Below are some measures the RBI and government can consider to protect the rupee, market participants say.
DOLLAR-WINDOW FOR OIL COMPANIES
The RBI could open a dollar window for oil companies to sell rupees and buy dollars from the central bank. This would reduce volatility in the rupee by enabling oil companies to directly source a large part of their dollar requirement instead of buying large chunks from the market. The RBI could sell the dollars to oil importers at its daily reference rate. However, that could severely strain the country's reserves given the country's large oil import bill.
DOLLARS AGAINST OIL BONDS
The RBI could conduct special market operations for oil companies, holding auctions to buy oil bonds and giving the oil companies foreign exchange at market rates. However, dealers say the outstanding amount of oil bonds is too small to lead to significant rise in dollar supply. The RBI opened such a dollar window for oil companies in 2008 and discontinued it in 2009.
SOVEREIGN-BACKED NON-RESIDENT INDIAN BOND
The government could issue a sovereign-guaranteed bond through State Bank of India to non-resident Indians at attractive interest rates, similar to the Indian Millennium Deposits issued in 2000, when the bank attracted around $7 billion for a $5 billion issue. However, such a move could increase the country's debt and interest liability.
SOVEREIGN OVERSEAS BOND
India could issue sovereign bonds to raise dollars from overseas investors. However, the RBI is wary of the government issuing bonds directly as it exposes the country to foreign exchange risk during repayment. One option would be to sell a dollar bond repayable in rupees. The Philippines was the first country in Asia to sell dollar bonds abroad to be repaid in its local currency in September 2010.
MORAL SUASION
The RBI can attempt to persuade banks and finance companies to raise funds in dollars abroad and bring them back to India to lend locally. Many banks have an ongoing forex bond issue programme, and the rupee's decline can make it attractive to raise dollars and convert them into rupees even after accounting for the hedging cost given the fall in forward dollar rates.
STAGGER IMPORT PAYMENTS
The central bank could issue rules to effect a delay in import payments, which typically are made at the end of every month. The bunched-up outflows put pressure on the rupee, and the RBI could look at asking for staggered payments.
