The Reserve Bank of India could potentially buy a record amount of dollars for the second year running to keep the country’s products competitive compared to those in other emerging market economies.
The central bank has already bought over $20 billion in this first half of 2015. This follows a record buying of $82 billion in 2014.
In March 2015 the Reserve Bank of India (RBI) began their purchase as the rupee started to gain. (see chart below)
The currency ended at 64.10/$ today 8th June 2015.
“Flows could slow down compared with 2014, but the RBI will continue to buy dollars,” said Ashish Parthasarthy, head of treasury, HDFC Bank. Hitendra Dave, head of global markets at HSBC, agrees. “The difference between 2014 and 2015 is that the current account deficit is far lower. Assuming the same amount of capital flows, it leaves a much higher amount of absorbable surplus for the RBI,” he said.
The Rupee has been rapidly appreciating against other currencies, such as the euro and the Japanese yen. The Real Effective Exchange Rate (REER) shows that since March the Indian rupee has been overvalued by 13%. The RBI’s REER which measures the currency’s competitive value against 36 other currencies was 113.23 in March, which means the rupee has to depreciate by at least 13% for Indian exports to reach a secure competitiveness.
“The rupee has remained strong relative to peer countries. While an excessively strong rupee is undesirable, it too creates disinflationary impulses,” RBI Governor Raghuram Rajan recently said in a statement.
However, Rajan went on to reiterate that RBI does not target exchange rates within their purchase algorithms.
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