India’s foreign exchange reserves are expected to remain under pressure as the Reserve Bank of India (RBI) continues efforts to stabilise the rupee amid ongoing balance of payments stress, according to a report by a global financial firm.
The report stated that the Indian rupee has become one of the weakest-performing Asian currencies following the escalation of the Middle East conflict, with only the Philippine peso falling more sharply.
According to estimates, the RBI may have sold between USD18 billion and USD29 billion in the spot market during March and April to control currency volatility. The report also noted that the central bank expanded its intervention beyond spot market operations.
The RBI’s outstanding short USD forward position reportedly reached nearly USD103 billion at the end of March, an increase of USD25.4 billion from the previous month. Although the figure may have eased to around USD85 billion in April due to contract maturities and weakness in the US dollar, the total intervention through spot and forward markets is estimated at USD10.8 billion, nearly 2% of India’s net forex reserves.
The report said the RBI has also used administrative and regulatory measures to reduce pressure on reserves. These steps included limiting banks’ open USD/INR positions and tightening rules around non-deliverable forward contracts linked to the rupee. Some restrictions have since been partially relaxed.
India also increased import duties on gold and silver to 15% from 6% in an attempt to manage the trade deficit and reduce dollar demand. Authorities are additionally exploring measures to attract foreign investments, including foreign currency bonds by state-run banks and lower taxes for overseas bond investors.
Other possible measures under consideration include easing borrowing rules, encouraging exporters to convert more foreign earnings into rupees, expanding bond market access for foreign investors and offering concessional FCNR deposits.
The report added that stricter controls on capital outflows could still be considered if pressure on the rupee increases further, although this currently appears less likely.
It also suggested that interest rate hikes remain a possible option. However, the report said aggressive rate increases may hurt economic growth, making them a less preferred tool for now.
Despite these measures, the report maintained a cautious outlook on the rupee and projected it could weaken to 98 against the US dollar in the coming weeks, though at a slower pace.
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