The Reserve Bank of India (RBI) is well placed to manage volatile FX market dynamics triggered by any reversal in capital inflows given that official reserves are now USD 340.3bn. However, the RBI may undertake short-term tactical intervention to ensure the FX market remains orderly rather than making a strategic bid to cap USD-INR at a specific level. The INR’s real effective exchange rate based on 36 trading partners posted a 4% gain in the first quarter of 2015 alone. “We think the combination of this INR trade-weighted appreciation and soft export news will cause the RBI to act more vigorously to prevent new INR trade-weighted gains (by buying USD-INR) rather than stemming new INR losses” says Standard Chartered.
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