As per the last annual report, the RBI had Rs. 7 Lakh crore
of currency and gold revaluation (CGRA) gains on its balance sheet.
Assuming a nominal growth of 12% pa and a constant FX Reserves to GDP ratio, in
5 years India’s FX reserves would be $700 bn. Assuming that USDINR is at Rs. 80
in 5 years the total gains in RBI balance sheet would be close to Rs. 13 Lakh
crores or $185 bn. These gains are like high return savings of the economy, the
fruits of which the country cannot enjoy. Therefore these gains have been a point
of contention for the government in the last 3 years and I would think that
given the recent developments at the regulator’s level there could have been a
few agreements to prevent this build up of CGRA gains in the RBI’s balance
sheet. These agreements could have been:
1) Restricting the intervention capability of the RBI in the
FX market (which is visible in the increased volatility in the last two
months).
2) Capping the FX reserves to GDP ratio of the RBI
The above is a speculation on my part, but seems logical
given that the root cause of the problem is RBI’s increasing FX reserve along
with a depreciating Rupee. The effect of this could be increased volatility in
USDINR (which we have seen recently) plus increased INR gains in times of inflows
(which RBI didn’t allow since 2014).
Consensus view of short USDINR got negated yesterday morning
as we are back in the 69.50-70.50 range. Price action yesterday indicated stops
while the price action today morning suggests some outflow. EM currencies have
depreciated mildly since yesterday. Middle of the range a 25 paisa move either
ways is very easily justifiable. Over the medium term I would think INR would
gain towards 68.80 levels. CMP 70.06, Range 70.25-69.80.
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