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Rajan Plays Middleman With Currency Intervention: India Credit

Photographer: Adeel Halim/Bloomberg

Raghuram Rajan, governor of the Reserve Bank of India (RBI), who took charge of the RBI on Sept. 4, the same day said he would offer concessional swaps for dollars raised by banks through deposits from Indians living abroad and overseas borrowings. Close

Raghuram Rajan, governor of the Reserve Bank of India (RBI), who took charge of the RBI... Read More

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Photographer: Adeel Halim/Bloomberg

Raghuram Rajan, governor of the Reserve Bank of India (RBI), who took charge of the RBI on Sept. 4, the same day said he would offer concessional swaps for dollars raised by banks through deposits from Indians living abroad and overseas borrowings.

India’s largest foreign-exchange intervention since the Lehman Brothers Holdings Inc. bankruptcy has helped smooth swings in the rupee, giving policy makers time to revive the economy, IDBI Bank Ltd. (IDBI) and UBS AG say.

The Reserve Bank of India bought and sold $10.3 billion in September, the most since October 2008, data published Nov. 11 show. It played the role of middleman after Governor Raghuram Rajan introduced discounted swaps to buy dollars from lenders, following sales of the greenback to state oil companies.

The rupee has jumped 8 percent from a record low on Aug. 28, the most among 168 global currencies, curbing inflation and the current-account deficit. Rajan’s window for banks attracted $17.5 billion as of Nov. 11, cutting their funding costs even as he lifted the RBI’s benchmark rate to quell price pressures. The government approved stalled projects worth at least 3.84 trillion rupees ($60 billion) this year to spur growth.

“The RBI’s swaps have helped steady the rupee,” N. Srinivasan Venkatesh, head of treasury at IDBI Bank in Mumbai, said in a Nov. 11 telephone interview. “By the time the transactions need to be reversed, probably starting next year, the RBI would have had a grip on inflation and the government can increase recent efforts to support growth.”

Inflation, Rupee

Venkatesh expects inflation to ease by February and predicts growth could accelerate to 7 percent in the year through March 2015. The RBI forecasts gross domestic product will increase 5 percent this fiscal year, matching the previous period’s pace that was the slowest since 2003. The rupee will strengthen to around 61 per dollar in January, from 63.73 today, as corporate inflows rise, he said.

The swap facility for refiners, the biggest purchasers of foreign currency in India, started on Aug. 29. Rajan, who took charge of the RBI on Sept. 4, said the same day he would offer concessional swaps for dollars raised by banks through deposits from Indians living abroad and overseas borrowings.

The swap window for banks, which closes Nov. 30, could attract as much as $25 billion, Economic Affairs Secretary Arvind Mayaram said in New Delhi yesterday. Refiners have resumed buying 30 percent to 40 percent of their dollar needs in the currency market, he told CNBC-TV18 on Nov. 7.

The rate at which banks borrow from each other for three months touched an almost four-month low of 9.01 percent on Nov. 6, National Stock Exchange of India Ltd. data show. The yield on the benchmark 10-year government bonds rose five basis points today to 9.10 percent.

Repurchase Rate

Rajan has raised the repurchase rate twice, taking it to 7.75 percent from 7.25 percent. Consumer-price gains have averaged 9.8 percent since the end of June compared with a 10.1 percent increase in the first six months, official data show. The rate will drop below 9 percent by the end of March, Rajan said Oct. 29.

Three-month implied volatility in the rupee, a measure of exchange-rate swings used to price options, has fallen 623 basis points since Aug. 30, the most among 52 global currency pairs tracked by Bloomberg. The rate has risen 326 basis points this month to 13.77 percent as signs of a recovery in the U.S. economy renewed concern that the Federal Reserve will begin paring stimulus in the coming months.

India’s central bank bought $3.4 billion and sold $6.9 billion in September, the latest RBI figures show, the most since October 2008 when it bought $2 billion and sold $20.6 billion. The nation’s foreign-currency assets stood at $248 billion at the end of September, little changed from the end of August, before rising to $254 billion by end-October.

Fed Tapering

“The RBI’s interventions have probably bought them some time, given the stress during the Fed tapering talks,” Ashley Perrott, the Singapore-based head of Pan-Asian fixed income at UBS’s asset management unit, which oversees about $642 billion globally, said by telephone on Nov. 12. “It’s given them a window to rebuild their credibility.”

The rupee is one of the currencies most sensitive to a potential reduction in the Fed’s asset purchases as India runs current-account and budget deficits, according to Credit Agricole CIB.

“Any addition to foreign-exchange reserves from non-resident Indians is insufficient to change the big picture of very weak fundamentals,” Credit Agricole wrote in a research report yesterday. “We retain our strong conviction negative view on the rupee in the medium term.”

‘Honeymoon’ Ending

There’s also a sense that Rajan’s “honeymoon is coming to an end,” Mitul Kotecha, Hong Kong-based head of foreign-exchange strategy at the French lender, said in a Nov. 6 telephone interview. Credit Agricole predicts the rupee will weaken to 65 per dollar in coming weeks and to 75 by end-2014.

Westpac Banking Corp. (WBC) says the rupee will strengthen to 56.50 by the end of next year as growth has probably bottomed in Asia’s third-largest economy. The Australian lender recommends investors buy the Indian currency when it drops below 64.

A stronger rupee will also allow India to benefit from falling oil prices, according to Westpac strategist Jonathan Cavenagh. He predicts Brent crude, which has tumbled about 4.7 percent in the past month to $106.07 a barrel, could drop to around $100 in the coming months.

“There are positives around the corner for India,” Cavenagh said in a Nov. 11 telephone interview from Singapore. “Policy makers need to build on the good work done so far.”

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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