Rupee hits one-month high on foreign fund inflows, traders wary of RBI

RBI has been aggressively buying dollars to prevent sharp appreciation in rupee and ensure export competitiveness

The rupee strengthened on Tuesday to its highest level in 1-1/2 months, boosted by foreign fund inflows to equities, though traders remain wary of central bank intervention to prevent a sharp rally in the currency.
 
The partially convertible rupee was trading at 73.50/51 per dollar at 07.55 GMT, after touching 73.45 earlier in the session — it highest since October 21. It ended the session to settle at 73.68 against the US dollar — a rise of 37 paise.
 
“The absence of the central bank from the market has helped the rupee break the 73.75 barrier," said a senior trader at a foreign bank. "The 73.40 is the next level to watch out for now."
 
The BSE and the broader NSE share indexes were trading 0.9 per cent higher on Tuesday. The benchmark indexes ended November with gains of 11 per cent each, driven by record inflows and on promising news surrounding vaccine efficacy rates.
 
Besides, positive developments on the Covid-19 vaccine front, improved domestic macro-economic data and weakness of the American currency against key rivals also supported the rupee.
 
On Friday, the rupee had settled 17 paise lower at 74.05 against the US dollar.

 
Forex market was closed on Monday on account of Guru Nanak Jayanti.
 
“The rupee appreciated on Tuesday on the back of weakness in dollar and rise in domestic markets. Market sentiments improved on optimism over positive developments in Covid-19 vaccine,” said Saif Mukadam, Research Analyst, Sharekhan by BNP Paribas.
 
The Reserve Bank of India (RBI) has been aggressively buying dollars from the spot market to prevent a sharp appreciation in the unit and ensure export competitiveness. That led to a massive infusion of rupees in the banking system, causing money market rates to crash with the overnight interbank call rate falling on some occasions below the reverse repo rate, the lower band of the policy rate corridor.
 
The RBI’s monetary policy committee is expected to leave interest rates unchanged on Friday, after data showed that the economy contracted less than expected in the September quarter alongside persistently high inflation.
 
Traders, however, are closely watching the commentary from the RBI around liquidity. “Official preference is to soak dollar inflows to keep rupee on an even keel, which has in turn pushed up INR liquidity. This has seen the INR surface as the regional underperformer vs US dollar year-to-2020,” said Radhika Rao, an economist with DBS Bank.
 
“The RBI is likely to ease its grip on the INR while focusing on mainstream policy and bond market stability,” she added, referring to the 2021 outlook.
 
Gaurang Somaiyaa, Forex & Bullion Analyst, Motilal Oswal Financial Services, said: “This week, market participants will remain cautious ahead of the RBI policy statement; expectation is that the central bank could keep rates on hold but Governor's stance on the overall economy is likely to trigger volatility for the dollar.”