The slew of measures announced by the Reserve Bank of India (RBI) on Wednesday to enhance foreign exchange inflows should help the rupee to outperform its peers in emerging market economies, experts said.
RBI said it has been closely and continuously monitoring the liquidity conditions in the forex market and has stepped in as needed in all its segments to alleviate dollar tightness with the objective of ensuring orderly market functioning.
It announced five measures to enhance foreign exchange inflows.
The Indian rupee, RBI said has depreciated by 4.1 per cent against the US dollar during the current financial year so far (up to July 5), which is modest relative to other EMEs and even major Advanced Economies (AEs).
Abhishek Goenka, CEO of IFA Global, said that in a nutshell, RBI has tried to boost short-term dollar inflows with the latest measures.
Vivek Kumar, Economist at QuantEco Research, said persistent pressure on the rupee has prompted the central bank to diversify its defence strategy by including macro prudential steps to encourage foreign inflows.
"We believe it would further help in rupee to outperform its peers in emerging market economies. However, it is unlikely to change the adverse global backdrop of a strong dollar, heightened geopolitical uncertainty, and still somewhat elevated commodity prices...," he said.
On Wednesday, the rupee surged 39 paise, its best single-day gain in over three months, to close at 78.94 against the US dollar after a sharp correction in crude oil, FIIs repositioning in capital markets and strong gains in local equities.
Commenting on RBI's announcement, Dilip Parmar, Research Analyst at HDFC Securities, said the actions will have a positive sentimental impact in the short term but will have a marginal positive impact over the medium term.
"However, for sustainable dollar inflows, global as well as domestic stability in growth and inflation is needed," Parmar said.
Shravan Shetty, Managing Director of Primus Partners, said with the US dollar hitting a 20-year high, the current policy initiatives will help reduce the impact of a higher cost of borrowing driven by rising inflation.
"These measures by RBI will help counter the outflow of dollars seen across asset classes while providing access to capital at a cheaper cost alleviating the impact of higher domestic interest rates," he said.
In its statement, RBI said the global outlook is clouded by recession risks.
Consequently, high-risk aversion has gripped financial markets, producing surges of volatility, sell-offs of risk assets and large spillovers, including flights to safety and safe-haven demand for the US dollar, it said.