The Indian Rupee continues to remain under pressure as volatility in the global market triggers capital outflows amid investors concerns over the stress levels in banks worldwide especially in the U.S and in Europe.
RBI Governor Das yesterday, said in a conference that India today has a well regulated and well supervised banking sector.
Not to forget, India has past issues with some private banks that have been lending to corporations that defaulted on their debt . Yes Bank and Lakshmi Villas Bank are some of these examples, and today these banks are well capitalized and their loan books are diversified as the RBI has tightened its grip on regulatory frameworks.
Also, the loan books of Indian banks are being more diversified, and Government Bonds portfolios are comprising only 18-22% of the total assets, meaning banks are not at greater risk than their western counterparts.
The central bank of India holds Forex reserves of over $560 billion USD and has been actively intervening in the Spot & Forward markets since 2022 as the U.S Federal Reserve started to raise rates to tackle higher inflation. Governor Das also cautioned, ”the worst of inflation is behind us,” but pointed out that with the Russia - Ukrainian war, along with monetary tightening by major central banks, that there is still stress for nations that have high external debt and more capital outflows, which can put pressure on their currencies and trigger imported inflation.
India also has sticker inflation of around 6.4% down from 6.52% in January, this while the RBI is expected to raise rates by 25 bps in the April monetary policy meeting . The Indian Rupee was among the worst-performing currencies among emerging Asian peers last year, counter weighed by a stronger dollar and outflows from local assets.
As a net importer of oil from Russia which grew 4 times in 2022, and less exposure to external debt means headwinds from shocks will be minimal which will help the Indian Rupee. However, as growth slows down in the West, this means more capital outflows and a flight to safer assets possibly taking place.
The RBI stance is very different than a month ago, where it didn’t allow markets to take the Indian Rupee above 83/$, but now it’s significant that the central bank could let to the USD/INR depreciate above 83 to save foreign exchange reserves.
The RBI’s equation is very simple as the Federal Reserve reduced its rates to zero back in 2020 because of Covid19, more money chased speculative assets especially in the emerging markets. And the RBI accumulated a lot of Forex reserves. Now the tables have changed. In addition to this, India also is not keen to add its bonds to global indexes due to concerns over potential ensuing market volatility not supporting capital inflows, and thus perhaps damaging the Rupee.
With current account deficits widening to 4.4% of India GDP in Q2, this means India needs to work hard to achieve better capital flows, particularly as tensions on some important global banks continue to be demonstrated.