Barua said the central bank might need to consider ways to increase its foreign exchange reserves, if the pool shrinks to nearly $500 billion in the coming months.
“The central bank should step in to ensure that a falling currency does not overshadow India’s fundamentals,” Barua wrote.
India’s currency has weakened 9.5% so far this year, with the central bank defending the rupee via dollar sales that have depleted its foreign exchange reserves to $545 billion from a high of $642 billion one year ago.
Although a depreciated currency may have some advantages in closing the trade deficit, the damage to the capital account in terms of loss of investor confidence will outweigh this benefit, he said.
According to Barua, the central bank may have to think about ways to increase its foreign exchange reserves, if the pool were to shrink to nearly $500 billion in the coming months.
“More capital is needed at this stage to stabilize the rupee and allow the RBI to replenish its reserve vault,” he said, according to the Reuters report.
In July, the RBI allowed banks to raise foreign currency deposits from non-residents at higher costs and allowed foreign investors to buy shorter-term local debt to encourage more inflows.
These measures only helped marginally, according to analysts.
It may be time for the central bank to prepare for other options such as those in 2013 when the rupiah came under pressure due to the US Federal Reserve’s announcement of plans to cut bond purchases.
It may be time to rethink the gamebook of taper tantrum, subsidizing futures and getting lumpy deposits from nonresidents, Barua said.
“NRIs are sensitive to India’s strong fundamentals and could be persuaded to deposit their dollars in India at attractive rates,” he added.
(With contributions from Reuters)
