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Monday, October 2, 2023

ANZ warns of rupee vulnerability to ‘speculative attacks’ on RBI control

Australia & New Zealand Banking Group (ANZ) suggests that the Indian central bank‘s policy of maintaining a stable rupee at lower levels could expose the currency to potential “speculative attacks” during significant risk events.

While policymakers aim to boost manufacturing and exports, ANZ economists Dhiraj Nim and Sanjay Mathur highlight potential drawbacks.

ANZ notes that deliberately reducing Indian rupee (INR) volatility could discourage hedging among exporters and importers.

This might leave them unprepared when volatility surges due to unexpected events, increasing future currency fluctuations and raising the risk of speculative currency attacks during external risk events.

The Reserve Bank of India’s efforts to absorb a majority of the $19 billion inflows into local stocks and bonds this year has helped strengthen foreign exchange reserves and curb rupee appreciation.

Despite the RBI’s stance that the rupee’s value is market-driven, ANZ believes recent currency movements indicate a potential shift in policy toward maintaining a stable and comparatively undervalued rupee.

ANZ points out that the rupee’s implied volatility is the lowest among emerging markets. While the RBI didn’t immediately respond to ANZ’s observations, the bank’s economists argue that given the easing of factors causing depreciation in Asian currencies, the rupee might be trending around 80.5 per dollar if it followed the pattern of Asian peers.

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