Rupee stages strong comeback after hitting an all-time low on March 7

The rupee has staged a stunning comeback after hitting an all-time low on March 7. It has appreciated 1.5 per cent against the US dollar in the last 10 days to become the best-performing currency in Asia.

In the last two days, the Indian currency has gained over 1 per cent. On Thursday, the rupee gained 0.61 per cent to close at 75.81 a dollar. This was the first time the rupee closed below 75 since it crossed the 76 mark on March 4.

A decline in crude oil prices from multi-year highs, along with the Reserve Bank of India’s intervention, was cited as a reason for the rupee’s gain. The country is also in a better position among emerging market currencies due to its $630-billion-plus foreign exchange reserves.

“The primary reason behind rupee strength has been the retracement in crude prices. Brent has corrected about 26 per cent from highs around $140 per barrel seen on March 7. For every $10 per barrel increase in average crude prices for the year, our current account deficit increases by $15 billion i.e. 0.5 per cent of GDP. That is how sensitive our balance of payments is to crude prices,” said Anurag Murarka, executive director, IFA Global.

Optimism about negotiations between Ukraine and Russia, possibility of alternative ways for Russian crude oil to reach buyers, and hopes of Iran nuclear deal being sealed have led to this retracement in crude prices.

The central bank’s intervention in the currency market was seen as another factor for the sharp rise in rupee. Importantly, the central bank’s presence in the market has kept speculators at bay, analysts said.

“Also, the RBI has been present to smoothen volatility. The RBI's presence has prevented the rupee from coming under speculative attack. The RBI is able to exercise better control over the currency with the huge war chest of reserves it has built up,” Murakra said.

The rupee saw resistance around the 77/$ mark due to strong intervention from the central bank. Most dealers were expecting the rupee to hit the 77 level after the Russia-Ukraine tension escalated.

The RBI’s foreign exchange reserves of over $630 billion are the fifth largest in the world. India’s international assets cover three-fourths of India’s external liabilities, including debt, equity and all other forms of contractual obligations.

Michael Patra, deputy governor of RBI recently said that perhaps the greatest strength of India’s external sector is the buffer provided by the holdings of foreign exchange reserves.

“The fall in oil from the $140/barrel mark towards $100 certainly takes the pressure off an oil-dependent emerging market economy like India, especially when there were talks of it going up to $200. News about China providing regulatory support to affected industries also pepped up the regional markets,” said Imran Kazi, vice-president at Mecklai Financial.

With sentiments improving globally following peace talks among Russia and Ukraine, the rupee could see some more gains.

“US$-INR likely to respect the resistance of 77.5 and appreciate back till 74.5 level in coming months despite expectation of a strong dollar as India is in a better position compared to other emerging markets and has significant foreign exchange reserves. Further, market sentiments improved on hopes of progress in peace talks between Russia and Ukraine along with a decline in crude oil prices,” ICICI Securities said in a note.