The rupee may fall further against the US dollar, prompting the Reserve Bank to adopt "orthodox" monetary policy like hike in interest rate to check depreciation of the domestic currency, an SBI report said Tuesday.
The rupee Tuesday slumped 16 paise against the American unit to trade at a life-time low of 71.37 on strong demand for the dollar.
In its research report 'Ecowrap', SBI said given the "inefficacy" of sterilised intervention, RBI may follow a relatively hands off policy in forex market for now.
"The rupee has now depreciated by 6.2 per cent since June 2018 when RBI started hiking rates. Even as the decline is in consonance with strengthening of the dollar, we believe it may continue further," the report said.
It noted that there has been a spate of RBI communications in recent times which have perhaps gone unnoticed by the market.
For example, in August Monthly Bulletin and also in RBI Annual Report, there is a detailed discussion on the costs of continued RBI intervention in the foreign exchange market, said the report.
In order to arrest the declining value of the rupee, SBI made a strong case for introduction of Standing Deposit Facility (SDF) at the earliest.
SDF is an unlimited, uncollateralised, fixed rate deposit facility, which once operationalised, would enable RBI to absorb unlimited liquidity without any constraint of securities.
"We also urge the government and RBI to quickly implement SDF without any further delay as it has no sterilisation cost.
"In the interregnum till SDF is implemented, RBI must continue with durable liquidity injections through regular OMO purchases so as to offset the current spate of liquidity withdrawals," it suggested.
According to SBI, implementation of SDF will serve three purposes -- negate the costs of sterilisation, lead to an increase in demand for bonds and ensure a lower supply of government bonds through less issuance of Cash Management Bills.
With the amendment to the RBI Act, 1934, SDF has now been made available for adoption.
It further said the current disturbances in foreign exchange market provide enough opportunities for RBI to fine tune its liquidity and foreign exchange management policies without bothering too much on attendant implications of market volatility, with a little bit of coordination from government on implementing SDF.