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RBI’s ‘massive’ intervention sparks rupee gains

The rupee strengthened on Tuesday from a near record low against the dollar after the central bank stepped in with what various dealers described as “massive” intervention, signalling an intent to defend the beleaguered domestic currency.

Some dealers said the dollar sales via state-run banks was to the tune of $400-$500 million, and continues a pattern of aggressive interventions this month as the rupee has threatened to touch a record low of 54.30 hit in December.

Traders widely believe the Reserve Bank of India is looking to defend the psychologically key level of 54, which the rupee breached early on Tuesday morning by falling to as low as 54.15 to the dollar, sparking the central bank action.

A worsening global risk environment and concerns about India’s fiscal and economic challenges have pounded the local currency, forcing the Reserve Bank of India to also adopt surprise measures such as forcing exporters to convert half of their foreign currencies in their accounts.

The RBI is offsetting the impact on rupee liquidity from its dollar sales by purchasing bonds via open market operations. On Monday it said it would buy up to 120 billion rupees in debt on Friday, its second such action in as many weeks.

“RBI will keep up the intervention though ongoing Greek impasse and broad dollar strength will keep USD/INR biased for gains,” said Radhika Rao, an economist at Forecast Pte in Singapore.

“As a backstop to alleviate liquidity strain, OMOs could become more frequent.”

The Indian rupee ended at 53.79 to the dollar, above a session high of 53.5 but below its 53.9750 close on Monday.

Analysts have doubts about whether the RBI can continue to succeed in defending the rupee in the face of steep global risk aversion and a lack of confidence in India’s fiscal standing.

A Reuters poll out on Tuesday showed respondents were split about whether the measures taken so far by the central bank would be effective in stemming the falls of the rupee.

“RBI is looking to contain any panic in INR by intervention and we expect this to go on ’til political developments in Europe see stability,” said Ashtosh Raina, head of foreign currency trading at HDFC Bank.

Despite the interventions, the RBI is mindful of liquidity, given the severe cash crunch in the banking system, which has sent repo borrowings to above 1 trillion rupees regularly since late April.

Its OMO announcement on Monday sent bond yields lower on Tuesday, with the benchmark 2021 bond yields ending down 2 basis points at 8.50 per cent.

Interest rate swaps eased as well. The 1-year settled down 1 basis points to 8.03 per cent and the 5-year fell 3 basis points to 7.45 per cent.

[Source: The
Economic Times]