The Reserve Bank of India's (RBI) calibrated and timely interventions in the foreign-exchange markets ensured the rupee stayed within the 80 mark against the US dollar, which has surged unexpectedly against all world currencies since global central banks began rowing back on monetary accommodation.
The psychologically important level was breached in the over-the-counter and derivative markets on Thursday, but spot trades on the rupee reflected the combined impact of robust North Block-Mint Road coordination and expectations of 5G-linked fund inflows, dealers said.
"In the past two years, the RBI, in consultation with the ministry of finance, has built large external buffers in the form of foreign reserves for precisely such a scenario," a top market source told ET. "Their management of outflows has stabilised the rupee through a period of elevated uncertainty, making it one of the better performing currencies." The RBI and the finance ministry could not be contacted immediately for comments.
The rupee was little changed on Friday at 79.88 per dollar, ranking as the fifth best performing Asian currency. The local unit has shed nearly 7.5% in six months.
Quantum of Sales
It has, however, outperformed when judged against the surge in the Dollar Index, which measures the unit against other major currencies. "Given that the dollar is strengthening, a stronger rupee against other currencies may not entirely be desirable as a deliberate policy choice," the person cited above said.
The Dollar Index gained about 12.5% this calendar year as international investors sought the safety of dollar-backed assets amid chances of sharper rate increases by the US Federal Reserve. While record high inflation is fuelling recession concerns, emerging market assets have lost sheen.
"The rupee is a function of the broader strength in the dollar index and its impact on emerging market currencies," said Ashhish Vaidya, managing director, DBS Bank India. "The RBI has ensured an orderly move in the currency, cutting any wild swings." This always pays off. "
During the day, the rupee fell to 79.96 in the normal spot market, prompting the central bank's intervention. The central bank likely intervened at two levels—at 79.96 and 79.86.
Two large foreign banks were seen selling dollars, although the quantum was not high. This led to expectations that two large telecom companies, likely bidding for 5G auction rights, could get overseas funds soon, dealers said.
The total quantum of dollars sold was estimated to be worth about a billion USD. The markets are estimating $4–5 billion inflows linked to 5G in the next few weeks, although there is no clarity yet on actual flows.
"Central bank intervention and expectations over 5G-related inflows stopped the rupee from sliding to the 80 mark in the normal trading hours Friday," said Anindya Banerjee, currency analyst, Kotak Securities. "The pressure on the local unit still exists, unless the pace of US rate hikes comes down."
The one-month volatility index in the USDINR pair rose just five basis points to 6.01 percent, versus a 32 basis point spike in the USDCNY (dollar-renminbi) pair, showed Bloomberg data compiled by ETIG. "The pace of decline has definitely been reduced by the RBI's robust defence, without which the rupee would have slid to much lower levels," said Venkat Thiagarajan, chairman, SYFX Treasury Foundation.