The Reserve Bank of India has mounted its strongest defense of the rupee in more than a decade, and said it's not done yet.
The measures rolled out by the central bank helped the Indian currency rebound from a near record low (nearly 97 against US dollar) but analysts are questioning how long the relief can last given India's heavy dependence on energy imports.
Earlier on Tuesday, RBI Governor Sanjay Malhotra, in an interview with MoneyControl, said that the central bank would consider further measures, if needed, to curb speculative trading in the market. FOLLOW MARKETS LIVE UPDATES
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Here's a look at further steps Indian authorities can consider:
Bigger Rate Hikes: The central bank last week raised interest rates -- from 5.25 per cent to 5.5 per cent -- for the first time in nearly four years and signaled further hikes. Unlike some of its Asian peers, the RBI has refrained from using monetary tightening to support the currency, but rising price pressures and a narrowing yield gap with the US are giving it reasons to turn hawkish. The rupee continues to face a capital inflow problem, with a sharp drop in net foreign direct investment causing the currency to be far more dependent on volatile foreign portfolio inflows than in the past. "Higher rates are one way to resolve the fundamental imbalance and is one key reason why we are forecasting RBI to hike rates further," Michael Wan, senior currency analyst at the lender, told Bloomberg.
Hiking MSF Rate: The RBI can raise its emergency lending rate for banks, making funds more expensive and tightening liquidity to support the rupee. The so-called Marginal Standing Facility currently stands 25 basis points above the key policy rate. The RBI last raised the Marginal Standing Facility (MSF) rate independently of the repo rate to defend the rupee in 2013. During the taper tantrum, the rate was raised by 200 basis points, widening the spread over the policy rate. The measure briefly slowed the rupee's slide. "Enhanced corridor on the upper side by increasing MSF rate will result in higher price of the rupee," Soumya Kanti Ghosh, chief economic adviser at State Bank of India, told Bloomberg.
Indian rupee's performance over the last one year. (Trading Economics)
Greater Exchange Rate Flexibility: The central bank should also look at allowing a more flexible exchange rate, according to Nomura Holdings Inc. and Emkay Global Financial Services. "A durable solution requires greater exchange-rate flexibility, allowing the rupee to adjust gradually rather than through episodic corrections," Madhavi Arora, chief economist at Emkay, told Bloomberg. The central bank has been intervening in the currency market in recent weeks to check rupee volatility. The RBI has repeatedly said that it doesn't target a specific level for the currency.
Lower Exporter Proceed Realisation Timeline: Authorities could further shorten the deadline for exporters to bring their overseas earnings back to India to six months, in line with the typical credit period for export payments, according to a State Bank of India note. The RBI had cut the timeline to nine months in June after extending it to 15 months last year when the US imposed punitive tariffs on India.
Long-term Capital Gains Tax Cut: A cut in the long-term capital gains on stocks could bring inflows and support the rupee, according to IIFL Capital. Foreigners have been relentless sellers of Indian stocks with net outflows exceeding $30 billion so far this year as investors shifted funds toward markets offering greater exposure to the artificial-intelligence trade. Finance Minister Nirmala Sitharaman said at the Bloomberg New Economy Forum on Tuesday that "the long-term capital gains tax is something on which a lot of people have been commenting," but she would "tread cautiously" on the question of taxation very close to the budget.
Raising Fuel Prices: Raising domestic fuel prices to reduce fiscal pressure and consumer demand for oil is an option, Nomura economists including Sonal Varma wrote in a note. Such as move can curb fuel demand over time, potentially reducing India's oil-import bill and demand for dollars, thereby supporting the rupee. India's state run refiners that command over 90 per cent of the market have kept diesel and gasoline prices unchanged since May 25. Private retailers, however, have raised prices. State refiners are losing 5.3 billion rupees daily on discounted fuel sales, according to ICRA.
(With inputs from Bloomberg news)