Rupee Underperforms Asian Peers as RBI Prioritizes Reserve Buffers


The rupee has lagged behind Asian peers in recent sessions despite overseas inflows, as the RBI has looked to absorb flows to rebuild reserves buffers rather than let currency appreciate.

Analysis of this news for a layman

The RBI or Reserve Bank of India is India’s central bank responsible for managing currency, money supply and interest rates. Over the past month, the Indian rupee has gained only 0.09% against the US dollar while currencies of other Asian countries like South Korea, Thailand, and Indonesia posted over 1% gains.

This divergence comes as the RBI has absorbed foreign inflows to accumulate dollar reserves instead of letting the rupee appreciate. Reserves help import necessities, stabilize financial markets during stress and inspire confidence in international trade. But India’s reserves had declined due to RBI’s dollar selling interventions over 2021-22.

Now with portfolio inflows rising after the Fed’s dovish tilt, RBI is rebuilding reserves despite reduced currency volatility. This conservative approach balances growth and inflation aims. But it keeps rupee gains below Asian peers as RBI market actions overpower investment inflows.

Rupee Underperforms Asian Peers as RBI Prioritizes Reserve Buffers

Original Analysis

The RBI’s priority on reserves accumulation indicates a cautious approach despite the growth optimism sparked by the Fed’s signals. Having learnt lessons from the 2013 taper tantrum crisis, the central bank appears keen to build a war-chest before global volatility potentially resurfaces.

With financial conditions still strained by dollar scarcity and looming recession threats, reliance on fickle portfolio flows to finance the current account deficit seems risky. Hence, the RBI has taken a conservative tact of absorbing speculative inflows to buttress stability buffers.

However, this balance between external risks and currency stability also restrains the pace of rupee appreciation versus peers. Some erosion in export competitiveness appears acceptable to the RBI currently compared to overdependence on hot flows.

Impact on Retail Investors

For equity investors, the RBI’s move signals confidence in growth prospects and a buffer against external shocks. Portfolio inflows even while reserves rise indicates foreign interest remains robust. Further currency stability aids corporate profitability while low volatility supports carries trade returns.

However, modest rupee gains versus Asian peers could temper overall upside for export-driven sectors in the near term. Also, high inflation, widening current account deficit and looming global risks can spur intermittent risk-off episodes challenging carry trades.

For debt investors, reserves accumulation signals low odds of sudden currency losses, ensuring steady external debt servicing. But continued foreign inflows and absorption may cap gilt yields, even with high policy rates. Investors should diversify across short and long-end papers.

Impact on Industries

Export-driven sectors may see a slight setback from currency lagging regional peers, hindering competitive positioning. Sectors like IT, pharma, textiles, and manufacturing stand impacted. However, global recession risks pose a larger threat currently.

Import-intensive sectors like oil and gas, chemicals, infrastructure and engineering equipment stand to benefit from a stable rupee regime focused on competitiveness. However, high commodity prices and imported input cost inflation still remain key challenges.

Overall, while rupee stability aids, prevailing external risks and high domestic inflation rather than modest currency gains remain the prime hindrance for most sectors currently. From a structural standpoint, calibrated gains aligned with fundamentals may enable sustainable export growth.

Long Term Benefits & Negatives

Over the long run, the RBI’s focus on reserves and minimal currency intervention helps achieve true external sector stability rather than through temporary currency manipulation. Gradual rupee appreciation reflecting fundamentals will aid export competitiveness.

Sizeable reserves also reduce risks of a currency crisis in periods of global volatility like the taper tantrum in 2013. This inspires confidence in India’s commitment to external debt obligations. Reserves also enable meeting import needs even during external shocks.

However, a sharp rise in reserves through deployment of excess liquidity risks higher inflation. Also, if inflows reverse rapidly, the RBI would still need to sell reserves to prevent excessive volatility. Hence moderation is required based on prevailing uncertainty.

Short Term Benefits & Negatives

In the near term, muted rupee gains prevent erosion of trade competitiveness as global demand wanes. But currency stability helps keep other imported inflation risks like commodities in check through lower pass-through. Brand India also stands to gain.

However, absorbing speculative inflows risks liquidity and inflation flaring if not sterilized aptly. Volatility from reversals cannot be fully insured by reserves alone. Recurring dollar purchases may also accelerate foreign asset accumulation on RBI’s books.

While currency stability has merits, true stability requires calibrated appreciation reflecting fundamentals. Excess intervention risks inflation and asset bubbles that breed instability. Gradualist appreciation is key for sustainable export growth.

Companies will gain from this

Reliance Industries: Lower currency volatility aids petchem exports and moderates imported input cost pressures for the oil-to-telecom conglomerate. High forex reserves also reduce external shock risks that can impact projects. Infosys: Outperformance versus global tech peers expected to continue with stable rupee boosting margins. Strong dollar earnings mitigate risks from potential US slowdown. Regained growth momentum supports valuations. ICICI Bank: Stable currency environment aids remittances and NRI deposits growth. Also helps keep headline inflation risks in check. Improving credit growth outlook and strong margins support prospects. However, high inflation and looming global recession pose larger challenges. Investors should see limited stock implications from RBI’s reserves build-up move alone.

Companies which will lose from this

Tata Motors: Muted currency gains versus Asian peers risks export competitiveness. Key exports include commercial vehicles and Jaguar Land Rover portfolio. Chip shortages and high input costs are bigger drags. Dr. Reddy’s: Lagging regional peers may pressure generic drug exporter margins near-term. But low currency volatility helps steady key US market growth prospects amid recession fears. Larsen & Toubro: Minimal rupee appreciation retains import cost pressures for the capital goods & infrastructure major. Execution ramp up key for new orders to bolster growth outlook amid competition. Most exporters cushion currency impact through hedges. Chip shortages, high input costs, and global demand outlook pose larger challenges. No major implications seen from this news.

Additional Insights

The RBI stands committed to currency stability with gradual appreciation reflecting fundamentals. This balanced approach builds resilience while supporting export competitiveness.


The rupee has underperformed regional currencies in recent weeks as the RBI has absorbed foreign inflows to build its reserves buffer. This conservative approach aims to insulate India’s economy against global volatility risks. However, stability-driven intervention restrains currency gains in the short term.

Author(s): Bhaskar Dutta, Title: “Re Gains Lag Asian Peers as RBI Builds Buffer,” Date: December 15

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