Rupee posts biggest gain in 6 months after RBI measures to support currency

By Karl Lester M Yap

 

The Indian rupee strengthened the most in six months after the central bank took some of its strongest measures to bolster the currency since the 2013 taper tantrum.

 

The currency gained 1%, its biggest jump since April, to 95.7575 per dollar on Monday. One-month dollar-rupee non-deliverable forwards slid as much as 0.8% earlier. Bond fell, with benchmark 10-year yield rising five basis points to 7.35%, the highest level since November 2023. 

 

The Reserve Bank of India on Saturday unveiled measures to prop up the currency after it neared a record low of 97 per dollar. The steps include a special window to meet state-run oil companies’ dollar needs and a reserve requirement on certain foreign-exchange derivatives. The RBI had raised interest rates Wednesday and signaled it was open to further tightening.

 

“These are tactical fixes, not structural solutions,” said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. “On face of it, the measures should constrain speculative positioning, raise hedging costs, tighten banking liquidity and provide some near-term rupee support,” she said.

 

The RBI has already taken several steps to bolster its foreign-exchange resources. Its diaspora deposit program raised a record $133 billion, swelling its forex reserves to nearly $800 billion in early September. But the pressure to defend the currency has since drained $51 billion from reserves in the past four weeks.

 

The rupee has weakened 7% this year, becoming one of the worst performers in Asia. RBI Governor Sanjay Malhotra said it was undervalued on some gauges, and that markets can be irrational in the short term.

 

The latest steps target demand in the foreign-exchange derivatives market. For the first time, the RBI introduced a foreign-exchange risk reserve, requiring lenders to hold with the central bank the rupee equivalent of 20% of the notional value of each derivative transaction above $2 million. The People’s Bank of China has a similar tool to manage pressures on the yuan by varying the reserve requirement on forward contracts.