New Delhi, March 31 – India’s foreign exchange reserves of over $700 billion are large enough to deter speculative activity and allow the Reserve Bank of India to intervene and stabilize the rupee, a report said on Tuesday.
The report from SBI Research said that current reserve levels are equivalent to more than 10 months of imports, and that short-term debt is below 20 per cent of reserves, providing room and time to intervene in the market to support the rupee if desired.
However, the research firm cautioned that volatile capital flows and high oil prices pose risks to the near-term outlook and urged several policy measures, including a special dollar window for oil marketing companies to meet the daily demand of $250–300 million.
"This should allow for better visibility on the genuine demand and supply dynamics of foreign exchange, and in measuring the effectiveness of various measures taken by the regulator to curb unwarranted volatility," the report said.
It cited the Committee on Capital Account Convertibility, saying that current forex reserves are much higher than the desirable level of at least six months of imports, but the short-term debt and portfolio holdings are higher than the desirable level of no more than 60 per cent of the reserves.
The report also called for a $100 million cap on trading books only, and not on the entire bank book level, as it creates operational challenges.
It suggested an "Operation Twist" to raise short-term yields while lowering long-term yields, "ensuring that various reference rates remain within the prescribed bands, aligned with the policy rate."
The Central Bank has "taken action to support the rupee," but the firm urged accelerating interventions by bringing in currencies from outside markets and incorporating alternative mechanisms (such as a special USD window for OMCs) since the fall of the rupee exceeds the macro fundamentals of the country by a wide margin.
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