The Reserve Bank of India (RBI) sees the current depreciation of the rupee as part of a "broader trend" and thinks it will be "futile" to defend the Indian currency against a "global tide", according to a person familiar with the central bank's thinking.
"There are certain factors, like global spillovers, which the RBI can do very little about. India is a price-taking country. It will be futile if the RBI tries to resist a global tide," the person said, requesting anonymity. "But if there are country-specific factors, then the RBI has formidable reserves."
The comments come after the Indian currency weakened to an all-time low against the dollar on May 9, with the US Federal Reserve having raised the federal funds rate target range by 50 basis points last week. In response, yield on the 10-year US government bond crossed 3 percent on May 5.
"There is a 'fly home' bias now," the person noted, commenting on the outflow of foreign capital from certain countries.
The RBI has been actively intervening in the foreign exchange market in recent days to reduce volatility in the rupee's exchange rate. As always, the central bank has no specific level for the exchange rate in mind and is more concerned with intra-day movements being limited to a "certain number of paise", the person quoted above said.
The RBI's foreign exchange reserves have declined in recent weeks to $597.73 billion as on April 29. According to the person quoted above, the fall in the reserves was not because of the RBI's actions in the foreign exchange market but due to the valuation losses of the central bank's non-dollar assets.
The RBI's foreign exchange reserves are held in assets denominated in various currencies. While the US dollar is the largest component, its appreciation against these other currencies - such as the euro, the yen, or British pound - means a fall in the value of these currencies in dollar terms and consequently a decline in the RBI's foreign exchange reserves, which are measured in dollars.According to the source's information, data on RBI's foreign exchange reserves scheduled for release on May 13 will likely show another fall in the reserves before posting a rise in next week's publication.