Rupee on a bruising journey as medium-term pressures remain severe: Anindya Banerjee

The Indian rupee is heading for a bumpy ride, and the worst is yet to come. That’s the warning from Anindya Banerjee, senior vice president and head of commodity and currency research at Kotak Securities, who says the currency could collapse before a brief recovery gives way to a second, potentially more damaging selloff.

The trigger is a confluence of two forces colliding: sharp regulatory moves tightening banks’ net exposure to the forex market and a real-time energy shock of historic proportions at the Strait of Hormuz.

First flash crash, then real damage

Banerjee expects the immediate market opening to be chaotic. Since it was the last working day of the financial year, corporate importers – who would normally step in as buyers – have mostly completed their transactions. That effectively leaves the Reserve Bank of India as the only meaningful bidder in the market.

“It can just crash flash and then recover,” Banerjee told ET Now.

The RBI is likely to intervene through state-owned banks to provide liquidity and prevent freefall, he explained. The central bank also has a significant short position in the forward market, giving it both incentive and ammunition to make the initial move.

But the relief, he warns, will be temporary.

Banks have until April 10 – and that’s the next risk window.

The regulatory change tightening the net open position limit gives banks till April 10 to liquidate their excess forex positions. Banerjee warns that once the initial panic subsides and the rupee bounces, another wave of selling could follow as banks approach that deadline.

“Once this episode passes in two days, we will return to the Strait of Hormuz,” he said. “If oil stays where it is, we could see the rupee again heading towards 94-95 levels.”

It also flagged the risk of speculative activity extending the move. In the past episode of currency stress, offshore markets have tended to front-run onshore selling – already buoyant in Singapore’s NDF market, where the rupee weakened by around 2% from the onshore open.

Hormuz factor: India has a price problem, not a supply problem

On the energy side, Banerjee was unequivocal about the stakes. With disruptions currently at around 6-7% of global energy supplies, every additional week of closure at the Strait of Hormuz increases the risk of a full-blown global economic shock.

“If this disruption continues, it will really start to affect the global economy – which will affect FDI flows,” he said. The outflow of foreign portfolio investors from India has already touched $13.5 billion, which was last seen during the March 2020 COVID-19 lockdown.

Brent crude was trading around $115–$116 at the time of the interview. Banerjee set a clear psychological threshold: “If we cross $120, the global panic intensifies.”

He offered a note of comfort particularly relevant to India. Unlike some economies that face real supply shortages, India’s exposure is to price shocks rather than availability. “It’s a very good situation to live in,” he said – though he added that persistently high prices would still directly affect inflation and the current account deficit.

FCNR scheme? Not yet – but on the table

Whether India can resort to emergency measures like the fresh FCNR (B) deposit scheme — last deployed in 2013 during a frenzy to stabilize the rupee — Banerjee said the country is not there yet. India’s foreign exchange reserves are significantly larger today, and macroeconomic fundamentals are more stable than in 2013.

“But if the Strait of Hormuz closure continues beyond the third week of April,” he warned, “things will get seriously worse – and many emergency measures can be considered.”