Will RBI use its ultimate weapon to save rupee, economy?

Moses Harding

Rupee is now at the door of the set short term target of 56-57 (low of 55.87). There should be genuine dollar supplies at 55.95-56.20 considering 57.00-57.25 attractive to sell August 2012 dollars. Exporters have been realising higher export receivables by selling 3M dollars first at 55.00-55.20; then at 56.00-56.20 and now prepared to sell at 57.00-57.20.

It is not because we have seen the "low" for the rupee but in anticipation of sharp gains in rupee into 52-53 considered as fair value. So, the objective is to realise higher gains unmindful of opportunity loss. It is not prudent to wait for the head or the tail of the move...locking 60-80% (of end-to-end move) is considered sensible given the market volatility.

Also Read: Will rupee retire at 60/$? Experts debate Nifty's next move

Now, it is not fair to expect the Government to come to the rescue of the rupee. They could do very little at this stage. All stake holders look up to RBI to provide relief. It is not that RBI is quiet; all possible measures are being rolled-out, unfortunately the measures could only reduce the pace of movement from bad to worse.

It is time for RBI to take the "ultimate weapon" by announcing sovereign bond issuance to the tune of not less than USD 20 billion; keep selling dollars in the market to take out excessive "long dollar" positions in the market and announce Rs 1 trillion of OMO bond purchases to absorb resultant rupee liquidity squeeze in the system.

What's the impact on the market?

• RBI will have USD liability in its books at cost say 6.0-6.5% for 3-5 year tenor
• RBI will add to rupee assets at yield 8.25-8.5% for 3-5 year tenor
• USD/INR will sharply gain to 53.50 and get into consolidation mode at 52-53 considered as fair value factoring in extended dollar rally against global currencies
• 10Y Bond yield to settle around 8.20-8.35%; considered affordable borrowing cost for the Government
• Open up expectation of rate cut for shift into aggressive growth supportive monetary stance

Will RBI act? It is crisis situation and it is time to act strong and hard. Let us see how things unfold.

The author is Head - ALCO and Economic & Market Research at IndusInd Bank.