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Analysts at Nomura believe the risk of the Indian authorities announcing measures, such as a nonresident deposit (NRD) scheme and/or some requirement on exporters to sell a proportion of their foreign currency earnings to help stabilise INR, is rising.

Key Quotes

“We believe such measures are unlikely to be imminent, or even necessary, unless there is further sharp/non-linear INR depreciation and/or a substantial intensification of stress in other financial markets.”

“Indeed, the Reserve Bank of India’s (RBI) FX reserve buffer remains substantial at around 239% adequacy (July 2018; based on IMF reserve adequacy measures), the local market is outperforming most other high-yielding EM countries, and key macro indicators are healthier than they were in 2013 when there was substantial balance of payment (BOP) stress.”

“In addition, rating agencies such as S&P (Economic Times, 17 August 2018) and Fitch (Livemint, 20 August 2018), have both identified only limited risks to credit ratings from INR depreciation (USD/INR having breached 70 when these statements were made).”

“Overall, we believe INR depreciation pressure is being driven more by global factors from broader EM stress, DM policy normalisation, higher oil prices (Middle East/Iran), broad US macro outperformance, US-led trade protectionism and negative China macro risks.”

“However, there are also local factors, including signs of limited RBI FX USD selling intervention (adjusted August FX reserves fell by USD3.3bn m-o-m; RBI July actual spot intervention and FX forward data were USD1.9bn and USD0.0bn, respectively), lack of concern over recent FX depreciation, 2 no sign of any urgency to hike rates, and a widening trade deficit.”

“That said, with little contagion from INR depreciation so far, and ample potential foreign currency supply from the RBI, we believe authorities should not be in a rush to utilize these measures. However, if they were to announce either one (more likely on exporter FX sales first, in our view), we believe the positive INR impact, beyond the initial rally, would unlikely be sustained – especially against the current global backdrop.”

“The NRD scheme could lead to a more substantive and prolonged rally in INR (possibly 2%+ vs. USD), but this would still be unlikely to change the depreciation trend, in our view.”

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