The Reserve Bank of India (RBI) has signaled an all-out effort to stabilize the Indian rupee, which recently approached a record low of 97 per dollar. According to Radhika Rao, Senior Economist and Executive Director at DBS Bank, the central bank is exploring a range of measures, including potential rate hikes, further tranches of currency swaps, special non-resident deposit schemes, and foreign currency debt to draw inflows.
Rao noted that while initial depreciation was viewed as a natural shock absorber for macro shifts, authorities are now concerned. "Unchecked FX depreciation could reinforce additional currency weakness, rather than helping to rebalance the external accounts," she stated on Friday.
RBI's Multi-pronged Intervention Strategy
The RBI has revived its monetary operations to slow the rupee's descent. A significant USDINR buy/sell swap worth $5 billion was announced, aimed at managing rupee liquidity and moderating forward premiums. This move is part of a broader strategy to backstop the currency.
Beyond direct intervention, Rao suggests that the RBI might also scrutinize outbound Foreign Direct Investment (FDI) more closely and encourage exporters to channel their proceeds into onshore markets. Concurrently, any easing of global oil prices would help stabilize the currency and improve overall risk sentiment in the market.
Market Focus on Monetary Policy and Dividend Payouts
Markets are keenly anticipating the RBI's monetary policy review in early June. There's an increasing likelihood that a rate hike could be priced in, especially if the rupee remains under pressure and geopolitical tensions, such as the US-Iran conflict, persist. Factors like incremental fuel price hikes, a pickup in food prices, and rising business inflation expectations further bolster the argument for potential monetary tightening.
Bond markets are also focused on the size of the RBI’s annual dividend contribution to the government's coffers, which is expected to significantly boost revenue uptake. Rao estimates the dividend payout could be close to Rs 2.7-3 lakh crore, representing 0.5-0.7 percent of India's GDP. This figure is comparable to the Rs 3.2 lakh crore projected in the FY27 Budget from state-owned companies and central bank surplus transfers, and the Rs 2.7 lakh crore transferred last year.