To manage balance-of-payments (BOP) pressures so far this year, the Reserve Bank of India (RBI) has allowed currency depreciation and drawn down around USD25bn from its FX reserves (currently: USD401bn) as a first line of defence, explains the research team at Nomura.
Key Quotes
“We think drawing down FX reserves is an effective strategy, provided pressures on the BOP are only short term in nature – but if they persist and the central bank continues to use its FX reserves, then non-linear effects can set in – falling reserves set into motion a vicious cycle of denting investor confidence and triggering capital outflows, in turn leading to a more-than proportional currency depreciation, and so on.”
“We conclude that the RBI probably has space to burn through ~USD20-30bn more of forex reserves, before it seriously starts considering other measures.”
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