The rupee, which has unexpectedly risen against all other world currencies since global central banks started scaling back on monetary accommodation, was kept within the 80 mark to the US dollar thanks to the Reserve Bank of India’s (RBI) calibrated and timely interventions in the foreign exchange markets.
The psychologically significant level was crossed on Thursday in the over-the-counter and derivative markets, but spot trading on the rupee shows the combined effect of strong North Block-Mint Road cooperation and expectations of 5G-linked capital inflows, according to dealers.
According to a prominent market insider, “the RBI has established huge external buffers in the form of foreign reserves over the previous two years in cooperation with the ministry of finance for precisely such a situation.” The rupee has been stabilized by its handling of outflows during a time of high uncertainty, making it one of the best-performing currencies. It was not possible to reach the RBI or the finance ministry right away for comment.
The rupee, which is ranked as the fifth best performing Asian currency, was barely changed on Friday at 79.88 to the dollar. In the last six months, the regional unit has decreased by around 7.5%.
Number of Dollar Sales
However, when compared to the rise in the Dollar Index, which compares the dollar to other important currencies, it has exceeded. According to the source cited above, “given that the dollar is strengthening, a stronger rupee against other currencies may not fully be desirable as a conscious policy choice.”
This year, the Dollar Index increased by around 12.5% as foreign investors sought the security of assets backed by the US dollar amid the potential for the US Federal Reserve to raise interest rates more quickly. While emerging market assets have lost some of their lusters, record high inflation is increasing worries about a recession.
According to Ashish Vaidya, managing director of DBS Bank India, “the rupee is a reflection of the broad gain in the dollar index and its impact on emerging market currencies.” “By preventing any sudden swings, the RBI has guaranteed an orderly movement of the currency. This is always profitable.”
The rupee dropped to 79.96 during the day in the regular spot market, which prompted the central bank to intervene. The central bank most likely made two interventions, at 79.96 and 79.86.
Despite the low quantum, two big foreign banks were observed selling dollars. This raised hopes that two sizable telecom firms, who are likely to compete for 5G auction rights, would soon receive funding from abroad, according to dealers.
A billion dollars was thought to be the value of all dollar sales. Although it is unclear exactly how much money will flow due to 5G in the next weeks, the markets are projecting $4 to $5 billion in inflows.
Anindya Banerjee, currency analyst, Kotak Securities, said that central bank intervention and anticipation of 5G-related inflows prevented the rupee from falling to the 80 levels on Friday during regular trading hours. If US interest rate increases don’t slow down, pressure on the local unit will continue.
According to Bloomberg statistics published by ETIG, the USDINR pair’s one-month volatility index increased barely five basis points to 6.01%, compared to a surge of 32 basis points for the USDCNY (dollar-renminbi) pair. Without the RBI’s aggressive defense, the rupee would have fallen to far lower levels, according to Venkat Thiagarajan, chairman of the SYFX Treasury Foundation.