The Indian rupee strengthened to a two-month high on Tuesday, with traders attributing the gain to sustained intervention by the Reserve Bank of India (RBI) in both onshore and offshore markets. The currency rose as much as 0.4% to 94.7988 per dollar, its strongest level since July 1, according to ThePrint.
RBI intervention offsets external pressures
Traders familiar with the developments told ThePrint that the RBI began selling dollars right from the start of the trading session at 9 m. Mumbai time. The support helped the rupee stand out among regional peers, most of which weakened amid renewed US-Iran hostilities and a climb in oil prices, a factor that typically pressures the rupee given India's large dependence on fuel imports.
The intervention comes as the RBI's forex stockpile has risen to a record $729.3 billion, boosted by about $72 billion of inflows from measures rolled out in June to attract foreign capital. As reserves have swelled, the central bank has become more active in the market, with rupee swings ebbing in August as it quelled volatility, ThePrint reported. The strategy signals an effort to counter expectations of persistent weakness in the currency, which has been one of Asia's worst performers for the past two years.
Dhiraj Nim, foreign-exchange strategist at Australia and New Zealand Banking Group, said: "The pattern of intervention suggests that the central bank is looking to alter importer expectations of rupee depreciation." Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, added: "The manner of the RBI's sales is their way of telling the market to unwind dollar long positions." He noted that stop-losses were triggered at 94.90, with the next key level at 94.75. An RBI spokesperson did not respond to an email seeking comment, ThePrint reported.
Growth data provides marginal support
The rupee also drew support from firmer-than-expected growth data released after currency trading hours on Monday. India's gross domestic product grew 7.8% from a year earlier in the June quarter, beating the 7.3% median estimate in a Bloomberg survey and the central bank's 7% forecast, according to ThePrint. A currency trader at a bank told The Hindu Business Line that the robust GDP numbers "are certainly helpful, though only at the margin."
Monday's surprise move
On Monday, the rupee rose 0.2% to a near four-week high, surprising most market participants, The Hindu Business Line reported. Flow- and position-related dollar selling pushed the currency towards the higher side of its expected 95.00-95.80 near-term range, a move that was "definitely not expected" especially with oil prices around $90 a barrel, a currency trader at a bank told the publication. The trader cautioned that momentum-driven moves have not tended to sustain in the past, and added that importers are likely to step up their hedging at current levels.
Forward book and economic headwinds
Traders will also be assessing the impact of the RBI's FX forward book, which hit an all-time high of $137 billion in July amid the central bank swapping FCNR(B) deposits raised by banks, The Hindu Business Line reported. Economists have pointed out that the size of the forward book leaves less room for sustained appreciation in the rupee, with the RBI eventually having to buy dollars to reduce its outstanding position.
Meanwhile, external pressures persist. S. Treasury yields rose to their highest since January on Tuesday amid renewed attacks between the United States and Iran, which lifted oil prices and stoked inflation concerns, according to The Hindu Business Line. The yield on the 10-year Treasury note was 2 basis points higher at 4.778%, near a one-and-a-half-year high. Oil prices rose following the resumption of fighting between the United States and Iran in the Middle East, with Brent crude climbing to $91.14 a barrel.
The rupee is expected to open inthe 95.14-95.18 range on Tuesday, according to traders, after settling at 95.1625 to the dollar on Monday, The Hindu Business Line reported, as persistent RBI intervention and favourable near-term momentum help offset the drag from rising yields and higher oil prices.