The Reserve Bank of India intervened in the foreign exchange market this week to curb speculation in the rupee, according to a person familiar with the central bank’s thinking, surprising traders who expected a more hands-off approach on the currency from the new governor.
After hitting a series of record lows in recent weeks, the rupee gained nearly 1% against the dollar on Tuesday, its biggest rally in more than two years and the most among Asian peers. The currency rose as much as 0.5% to 86.4238 in early Wednesday trading.
The rupee’s rally comes just ahead of Prime Minister Narendra Modi’s meeting with US President Donald Trump this week. India is among the countries that are most exposed to risks from Trump’s vow to impose reciprocal tariff on trading partners. The rupee’s retreat from record lows will help defuse currency-related tensions between India and the US, according to DBS Bank.
“The central bank’s decisive hand is likely to stabilise the rupee in the near-term, with the direction thereafter to be dictated by global dollar movements,” said Radhika Rao, senior economist at DBS Bank Ltd. in Singapore.
The intervention in the previous two sessions has been substantial, according to market participants. While the RBI didn’t disclose the magnitude of its intervention, Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, estimated it could have been as much as $11 billion over two days, which he said are levels not previously seen from the authority. The dollar sales by the RBI may be more than $10 billion, DBS said in a note.
The RBI decided to intervene on Monday and Tuesday after spotting an unusual build-up of speculative positions, which put added pressure on the local currency, the person said, asking not to be identified discussing internal matters. The central bank won’t hesitate to intervene significantly and suddenly to prevent an accumulation in speculative bets, the person said.
The regulator had been keeping a close watch on open positions in the currency markets since the rupee had come under pressure in recent weeks, the person said. The central bank’s position on the rupee remains unchanged in that it’s not targeting a specific level for the currency, but will intervene to smooth out volatility, the person said.
The RBI didn’t immediately respond to an email seeking comment.
New Governor Sanjay Malhotra, who took office in December, had signalled to officials his willingness to let the currency depreciate in line with its Asian peers to help correct some of its overvaluation, Bloomberg News previously reported. The rupee has weakened about 2% against the dollar since his appointment.
At a press conference following last week’s interest rate decision, Malhotra said the central bank wants “orderliness and stability” in the currency and doesn’t see the need to intervene daily.
One outcome of the central bank’s interventions has been the shortage of rupee liquidity in the financial system. To counter that, the RBI has ramped up its liquidity injections, with cash shortfall rising to about two trillion rupees ($23 billion) on Monday, compared to a surplus of about 3 trillion rupees in November.
The monetary authority injected 1.94 trillion rupees via variable repo auction on Wednesday. This comes after it doubled its bond-purchase plan to 400 billion rupees for this week.
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