Mumbai: With the rupee remaining under pressure amidst a sell-off in emerging market risk assets, market participants are expecting a host of rate and non-rate measures from the Reserve Bank (RBI) and the government in the coming days.
According to Singapore-based DBS Bank, tapping foreign exchange reserves will be the first line of defence, which is already underway.
Rate hikes will be the next recourse, which is a prudent policy move but has not been most effective in arresting a weakening rupee. Thereafter, it said liquidity tightening could be accompanied by specific measures like higher returns on NRI deposits or fresh bond issuances.
“The markets are beginning to price in a possible scheme to raise NRI funds. The proposed size could also be in the range of $30-40 billion taking the past scale as a gauge,” DBS Bank said.
On Wednesday, the rupee touched an all-time low of 72.92 a dollar in the intra-day trade. However, it staged a smart recovery on reports about possible fiscal and monetary measures to stabilise the rupee. The rupee finally ended the session at 72.19 a dollar, up 0.7 per cent from its previous sessions close of 72.70.
Analysts at Bank of America Merrill Lynch (BoAML) too believe that issuing NRI bonds are more effective than rate hikes. It expects the ministry of finance and RBI to raise NRI bonds worth $30-$35 billion if the rupee persists above 70 level mark into the December quarter without a revival in FPI flows.
Highlighting that all the three NRI bond issuances (1998, 2000 and 2013) were able to fend off contagion, BoAML however noted that only one of the three monetary tightening actions (1998) had even partial success.
This, according to it, is because FPI investment in equities, that chase the India’s growth story, is almost 8 times higher than their investment in bonds.
DBS Bank is also expecting the government to encourage non-debt creating FDI inflows, by relaxing few of the sectoral thresholds and ironing out procedural delays.