New Crisis: Does RBI have enough ammunition to handle

SMC Global has come out with its report on the rupee depreciation and possible RBI intervention. Here are the key observations:

1. The steep rupee depreciation has been occupying lots of thought process in the minds of the market participants. 2. This rupee depreciation has opened up debate regarding the possible RBI's intervention to support rupee. 3. However, close observation of some of the macro ratios can give some perspective regarding whether RBI can intervene or not. 4. There is a ratio of "Forex Reserves to Total External Debt". This ratio indicates the total forex reserves as % of total external debt. 5. Currently (as per the latest data available as of 30th June 2011), this ratio of "Forex Reserves to Total External Debt" is about 99.6. This indicates that the total forex reserves of India are about 99.6% of the total external debt. To put in other words, the total forex reserves are lower than that of total external debt. 6. Where as in the year 2007-08, this ratio was at 138. Meaning thereby, the total forex reserves of India were 138% of total external debt. To put in simple words, India had buffer of excess forex reserves over and above total external debt to handle the global economic shock of 2008 crisis. 7. However, considering the current ratio of 99.6, this time the ammunition of RBI is restricted in handling the crisis. This time India has lesser forex buffer to handle the shocks of 2011/12 crisis Until now, the European crisis has not completely unfolded. The European crisis is still in early stages, and Indian rupee has already went below 2008 depths. If the European crisis completely
unfolds from here, RBI may not have enough buffer to withstand the shocks on Indian currency. 8. To enable intervention by RBI, two things are needed. "Intention of RBI to intervene" and "Ability of RBI to intervene". This time it is appearing that RBI has no much ability to intervene, even if they have intention to intervene. 9. The market participants who are anticipating RBI intervention shall realize that such intervention may not come this time. In that backdrop, if European crisis completely unfolds, the bottom for Rupee is appearing to be quite far away. 10. There is one main difference between the 2008 crisis and 2011/12 crisis from the Indian economy point of view. We went into 2008 crisis with strength on our side, we are entering into 2011/12 crisis with weakness on our side. Check the attachment fotr the report

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