India May Need 2013-Style Measures to Support Rupee Amid Persistent Pressure

India's Rupee Crisis: Policymakers Consider Reviving Measures from 2013

A report by MUFG's Michael Wan suggests that India may need to revisit some of the measures used during the 2013 rupee crisis if pressure on the currency persists. Wan's analysis indicates that policymakers are likely to explore additional steps to support the rupee amid weak capital inflows, elevated oil prices, and uncertainty surrounding the Strait of Hormuz.

Policymakers' Efforts to Support the Rupee

Policymakers have already taken several steps to support the rupee, including raising import duties on gold, restricting silver imports, increasing scrutiny of the non-deliverable forward market, and allowing domestic fuel prices to rise gradually. However, the report cautions that some measures may carry unintended consequences. Tighter restrictions in currency markets may have increased hedging costs and weighed on sentiment among foreign bond investors.

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Possible Policy Options to Support the Currency

The report by MUFG Bank outlines a range of possible policy options that could be deployed to support the currency, many of which resemble measures used during previous episodes of rupee stress. These include:

Measures to Support the Currency

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Among the measures highlighted was a potential FCNR(B)-style swap window for NRI deposits. MUFG noted that a similar programme launched in 2013 helped mobilise billions of dollars in foreign-currency deposits and borrowings, contributing to the stabilisation of the rupee during that period. The bank also suggested that authorities could consider tightening outward remittances under the LRS, issuing foreign-currency bonds targeted at non-resident Indians, relaxing external commercial borrowing norms, and expanding dedicated foreign-exchange facilities for oil importers.

Risks to the Rupee

The report comes against the backdrop of a weakening rupee and growing concerns over the impact of higher crude oil prices on India's external balances. MUFG continues to view the currency as vulnerable across a range of scenarios, citing weak capital inflows, a wider current-account deficit, and risks to energy supplies from a prolonged disruption in the Strait of Hormuz.

Capital Flow Challenges

According to Wan, India's capital-flow challenges predate the latest geopolitical tensions and reflect broader changes in the country's balance of payments. The report argued that net direct investment inflows have weakened sharply as foreign companies increasingly repatriate capital and profits, leaving the rupee more dependent on volatile portfolio flows.

Monetary Policy Outlook

MUFG expects the Reserve Bank of India to raise the repo rate by at least 50 basis points this fiscal year, taking it to 5.75 percent. In more adverse oil-price scenarios, the bank sees the possibility of deeper rate increases, with the terminal policy rate potentially rising to between 6.25 percent and 6.75 percent.

Long-term Impact

The report stressed that policy interventions alone would not be enough to provide lasting support to the currency. "Overall, we think for these measures to have a durable impact on supporting INR they would need to improve the ease of doing business in India and ultimately improve long-term earnings prospects in India relative to other markets," Wan wrote.