Balance Sheet Flexibility May Allow RBI To Let Rupee Appreciate: Report

Mumbai:

The Reserve Bank of India (RBI) is likely to be comfortable about its balance sheet at the end of March 31, which would give it more flexibility in letting the rupee appreciate, Citi analysts wrote in a note released on Wednesday.

Under a new economic capital framework adopted by the Indian central bank in 2019, it is required to maintain risk buffers at between 24.5% and 20% of its balance sheet.

The RBI considers this buffer during forex interventions, Citi economists said, adding that comfort on the buffer front could mean the RBI will be relatively open to allowing some rupee appreciation.

Citi estimates the RBI’s gross forex sales in the first nine months of fiscal 2023 at $189 billion against $96 billion in the whole of fiscal 2022.

“Higher gross sales are likely to generate more profits for the RBI and offset some of the losses in other parts of their portfolio,” said Samiran Chakraborty, senior economist at Citi in the note.

Revaluation reserves form a part of the RBI’s risk buffer and a depreciated rupee helps with build-up since it implies that the RBI is sitting on gains.

“The RBI’s forex intervention to keep the rupee relatively depreciated against the US dollar has resulted in sufficient buildup of revaluation reserves,” noted Chakraborty.

This buildup is sufficient to meet RBI’s more stringent risk buffer of 24% without it having to reduce its dividend to the government.

Citi reiterated its call to go tactically long on the rupee against a basket of Asian currencies and expects the South Asian currency to reach 80 per dollar “over the medium term”.

Chakraborty pointed out that there has been a sizeable improvement in India’s current account outlook, which he thinks “is still under-appreciated by the markets”.

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