Reserve Bank of India may have intervened in forex market to stem rupee fall, say dealers

Mumbai: The Reserve Bank of India (RBI) likely intervened heavily in the foreign exchange market right from the start of trade on Wednesday to stem any fall in the rupee, three dealers said.

"It looks like RBI is in a mood today,” said a senior dealer at a state-run bank, estimating that within the first 10 minutes the RBI might have sold $300 million to $400 million proactively to prevent any sharp fall in the rupee.

The rupee was trading at 67.8775 to the dollar compared with its previous close of 68.15 as against expectation of the rupee weakening early on itself on firm crude and widening India trade deficit.

Representational image. News18

Representational image. News18

Sharply rising US dollar yields have boosted the dollar on international exchanges, and the rupee was also coming under pressure from firm crude oil prices that will weigh on India’s already widening trade deficit.

Some dealers had anticipated that the RBI might refrain from intervening on Wednesday as it suspected intervention on Tuesday had failed to stop the rupee hitting its weakest level since 27 January, 2017.

The rupee swung in nearly one percent intraday range on Tuesday, its most volatile day in about a year.

“Nobody can understand what the RBI wants to do with the rupee. It says it intervenes to curb volatility but sometimes it allows the rupee to move wildly and sometimes it is holding it with a heavy hand,” said another dealer at a foreign bank.

Bond prices strengthened on the rupee’s unexpected recovery.

The 10-year benchmark bond yield stood at 7.88 percent early compared with its previous close of 7.90 percent. However, both forex and debt traders were doubtful whether the rally in the rupee and bonds would last through the week. Indeed, bond dealers expect the yield on 10-year paper to cross the 8-percent mark, a level unseen since June 2015, due to inflation concerns.

Forex traders also expect the rupee to breach the record low 68.8650 level, last touched on 24 November, 2016. “It is quite difficult to sustain the rally given India’s weakening macro-economic parameters,” said another dealer at a foreign bank.

The rupee has been the worst performer in the region, losing more than 5 percent so far in 2018 while inflation risks have increased on high oil prices raising the probability of faster hikes in interest rates by the RBI.

The trade deficit widened to $13.72 billion in April from $13.25 billion a year ago and could rise further with India importing 80 percent of its oil needs.

Rupee rebounds

Meanwhile, PTI reported that rupee rebounded by 27 paise to 67.80 per dollar in early trade today on fresh selling of the US currency by exporters and banks. Yesterday, the rupee had lost 56 paise -- the second biggest single-day fall of 2018 -- to end at a new 16-month low of 68.07 as panic dollar demand rattled the currency market.

Traders said the dollar's strength against other currencies overseas, as a surge in the benchmark 10-year Treasury yield above 3 per cent reignited a rally that had lost steam last week, capped the rupee's gains.

(Read a related article here: The RBI might have to intervene to restore sanity)

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Updated Date: May 16, 2018 12:21:37 IST

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