RBI intervenes to stem unabated rise in rupee

The relentless rise of the rupee was partially stemmed on Thursday by the intervention of the Reserve Bank of India (RBI)

in foreign exchange markets — possibly the first such instance this year.

According to forex traders, RBI stepped into the market to buy dollars when the rupee rose to 44.10 against the greenback, a move that immediately nudged the rupee down from a 25-month intraday high to 44.25. RBI’s intervention is estimated to have been in the range of $400 million. In addition, state-owned oil companies bought dollars worth over $1 billion, taking the total market intervention to $1.5-2 billion.

However, sustained pressure in the form of foreign inflows buoyed the rupee again and its closed at 44.12 against the dollar, compared with its previous close of 44.52, according to Bloomberg data.

“The markets are likely to be volatile over the next few weeks because of the supply-demand mismatch. RBI action will smoothen out the mismatch and, as a consequence, temper market volatility,” said Hemant Mishr, managing director and head of global markets at Standard Chartered Bank. He expects the rupee to move up to 43.50 in coming weeks and end December near 44.0.

While RBI has been reluctant to intervene in currency markets, Governor D Subbarao last Saturday said the central bank would do so if it believes that inflows are “lumpy and volatile or if they disrupt the macroeconomic situation.” Subbarao said RBI had not intervened in the forex markets up until then.

Next week, Coal India's record Rs 15,000-crore initial public offering is expect to attract billions of dollars from foreign investors and also cause a temporary crunch in domestic money markets.

A senior State Bank of India official said there are concerns about a liquidity shortage, with an estimated Rs 11,000 crore expected to flow out of the system for the IPO.

Consequently, banks have stepped up borrowing at RBI's liquidity adjustment facility window, the official added. RBI is likely to make available to banks a second LAF window to tide over the anticipated cash crunch next week, according to reports.

“Reported RBI intervention, carried out through public sector banks, kills two birds with one stone. It will temper the rupee's appreciation and inject liquidity into the system,” said a senior public sector bank executive. 

“The rupee had a gap-up opening at 44.25 after closing yesterday at 44.52, as the currency received a boost due to a weaker dollar. With good US earnings reports boosting sentiment, a further upside in the rupee looks likely,” said the treasury head of a large private sector bank.