Central bank loosens its grip, lets rupee gain
RBI has allowed the rupee to strengthen in a bid to cool import-led inflationA stronger rupee will assist India’s crude imports, which have been falling for five straight months as demand slowed
MUMBAI : With the Reserve Bank of India (RBI) signalling a marked shift in its foreign exchange intervention strategy, the rupee is expected to face sustained upward pressure vis-a-vis the dollar, currency traders said.
In recent weeks, the Indian currency has steadily appreciated, hitting a six-month high of 74.40 against the dollar.
Forex traders attributed this change to fewer interventions by the central bank in the spot and forwards market so that the rupee appreciates, thereby bringing down imported inflation.
Until last week, the central bank had been shoring up its reserves by buying dollars.
RBI had bought $30 billion worth of dollars in the four months through July to bolster its foreign exchange reserves to a near-record $537.5 billion.
A stronger rupee will support the country’s crude imports, which have been falling for five straight months as fuel demand slowed amid renewed covid-induced curbs.
Traders believe that the central bank will continue to allow the rupee to strengthen to make imports cheaper to cool inflation, which continues to hover around 6%.
Significantly, in the recently held monetary policy committee meeting, members cited the appreciating rupee as a comforting factor, while voting to keep key policy rates unchanged.
“The sharp fall in USD/INR spot has been very unexpected, and traders are in shock with every major support being tested. Initially, RBI was protecting the 74.50 zone, but its absence has led to a free fall for the dollar," said Rahul Gupta, head of research, currency, at Emkay Global Financial Services.
“Globally, risk sentiments have strengthened on aggressive stimulus by the US Fed and there have been sharp inflows into stocks. The question arises whether we can expect RBI’s intervention going ahead or is it comfortable with the current levels," he added.
According to Bhaskar Panda, executive vice-president at HDFC Bank Ltd, “the dollar-rupee has moved below the 200-day moving average, which is 73/74. Once it has broken through the levels, there is an expectation of dollar-rupee going towards 71.80-72/$ in a matter of months."
The rupee closed at 72.87 on Tuesday, up 1.02% from its previous close.
August has seen large foreign inflows as many large financial institutions, including ICICI Bank, Axis Bank and Housing Development Finance Corp. raised ₹35,000 crore from overseas markets. Foreign portfolio investors purchased $6.42 billion in August alone.
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