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Risks To The Rupee Not From Bond Purchases

  • Goldman Sachs sees the RBI's announced purchase programme as a drop in the ocean: "More signal in muted rates reaction than noisy currency selloff. USD/INR spiked higher this week in a knee-jerk reaction to the RBI's commitment to purchase a fixed amount of government securities (INR1tn) over the next few months under a new G-sec acquisition program. However, liquidity injections via RBI bond purchases aren't new with RBI buying INR3.1tn worth of bonds over the past year using OMOs, in addition to the large liquidity injections due to their FX market purchases. The bond market had widely expected more bond purchases, with our calculations suggesting RBI could buy INR4.7tn worth of bonds this year, and accordingly had only a muted reaction to the announcement. With front-end rates already at the bottom of the policy corridor—and RBI likely to normalize liquidity conditions over the coming year, pushing front-end rates higher towards the policy rate with its cash reserve ratio hikes—we don't buy into the "QE should drive the currency weaker" argument, although given persistent interventions to slow Rupee appreciation in the past, we don't expect much push back to this interpretation. The bigger, near-term risk to the Rupee stems from the health front, and particularly from further equity outflows as the domestic virus surge continues. However, with the overall broad balance of payments still likely to remain positive this year, we still see flows as still supportive for INR, and USD/INR should grind lower in the medium term, especially on a return to a weaker dollar environment."

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