While the rupee has depreciated at a modest pace compared to many of India’s trading partners, the armoury of forex reserves is a lot more comfortable than 2013. There is still more room for the value of the rupee to ease further.
RBI’s reserves adequacy ratio – an average of IMF measures under four forex regimes, now stands at 236 percent, down from 266 percent in September 2024 when the foreign exchange reserves had peaked to $705 billion. But it is still significantly higher than 176 percent seen during the taper Tantrum in August 2013, shows a study by Nomura.
The four regimes it talks about are fixed exchange rate regimes with and without capital controls and a floating exchange rate regime with and without capital controls. India’s reserves adequacy is the highest among emerging Asian peers ( excluding Japan) in all the matrices, the data showed.
A study by Bank of Baroda’s research team shows that there has been a significant pressure on global currencies since November 01, 2024, which is before the US elections result till 10 Jan 2025. They depreciated anywhere between 7.6% (South Africa Rand) to 2 percent (Thailand Baht). In the same period, the dollar, as measured by the DXY rose by 5.1 percent. The average depreciation in the sample of currencies is 4%, in comparison, INR depreciated by only 2.2 percent.
“ A point of stress could be a decline in forex reserve adequacy ratio to below 180%. We note that, when India faced significant balance of payments stress after the 2013 taper tantrum, forex reserve adequacy reached a low of 176 percent in August 2013 “ said Nomura . This triggered a strong response from the RBI to stem the rupee depreciation via reaching out for external financing (FCNR (B)). “ An forex reserve adequacy of 176 percent equates to FX reserves of $ 407bn or $ 138bn below current levels” Nomura said . Put simply, the Reserve Bank can still sell dollars till reserves reach $407 billion excluding the revaluation impact.
India’s financial conditions have tightened marginally since September 2024, but remain stable or a little changed in recent months, especially when compared with the tightening of financial conditions during the 2008 global financial crisis, the 2013 post-Fed taper tantrum and 2020 Covid-19 pandemic periods.
We could still be comfortable even with a 20-30 paise depreciation in the rupee, economists said. “ Under ceteris paribus conditions where only the external conditions are considered, there is still room for depreciation of 20-30 paise in value of rupee” Bank of Baroda economists said in a report.
