The Reserve Bank of India has intervened in the open market to stem the rupee’s losses in recent times and is likely to continue to do so, albeit the intervention will be to keep the currency range-bound.
Regarding currency depreciation worries for India, sources told NDTV that the RBI would participate in the market “to smoothen the impact” and “curtail jerky movements in the rupee.”
While the rupee has gained to 77.25 per dollar from new all-time lows beyond 77.50 hit on Monday, it is still above the previous weak record levels of around 77 in March.
Traders said the RBI may have intervened – through state-run banks’ selling dollars in the open market – after the rupee plunged to 77.44 on Monday.
People familiar with the matter said the latest exchange rate movement is part of a broader trend.
Indeed, the sell-off in risky assets, including the rupee, has been driven by traders looking at safe-haven investment opportunities on surging inflation, higher interest rates and slowing economic growth worries.
In addition, a tightening lockdown in China, Europe’s plan to ban Russian oil in response to its war on Ukraine, in its third month, and slowing economic growth risks from spiralling commodity prices have boosted the safe-haven appeal of the US dollar.
The US Federal Reserve is poised to hike interest rates aggressively, which has also driven the dollar to two-decade highs.
Capital outflows from emerging markets are the fallout of aggressive US monetary policy. Investors tend to shelter in American assets during a rate hike cycle in anticipation of the resultant slowing in economic activity.
Like other emerging market nations, India has witnessed sharp outflows from its capital markets, which have hurt the rupee and the country’s foreign exchange reserves in recent weeks.
India’s forex reserves have fallen below $600 billion for the first time in a year, declining for eight consecutive weeks, weighed by persistent capital outflows and the rupee’s weakness driven by the dollar’s broad surge in recent months.
FX reserves have declined for eight weeks in a row, with nearly $34 billion, or about 5.4 per cent, wiped out since Russia invaded Ukraine on February 24.
Comments from sources on the RBI intervention to curtail jerky movements in the rupee, mirror a Bloomberg report which showed analysts expect the central bank to mount a more limited defence, aiming to stem the rupee’s losses only from the worst of speculative attacks rather than fight the global trend.
“The RBI will be careful to fight cavalier speculators and not the Fed. That is to say, prudence warns against trying to defy broad-based dollar trends. After all, a $600 billion-plus reserve coffer is harder to build than it is to burn,” Bloomberg quoted Vishnu Varathan, head of economics and strategy at Mizuho Bank, in that report.
Indeed, the country took over a year to build its FX reserves to over $630 billion and in just a touch over two months, or since Russia invaded Ukraine late in February, India’s import cover war chest has declined by nearly $34 billion, or about 5.4 per cent.