How RBI stepped in when rupee hit lifetime low

Aggressive central bank intervention, currency dealers said, helped the rupee close at 78.04 to a dollar, down a quarter of a percentage point, Bloomberg data showed. This is a record closing low for the rupee, which breached the 78 mark at close for the first time. But several other Asian units, including the Chinese yuan, fared even worse.

The RBI did not immediately respond to ET’s mailed queries on the central bank’s currency-market intervention strategy.

“The rupee is losing value in sync with global trends as overseas investors seek the safety of dollar-backed assets in the prevailing risk-off environment,” said Parul Mittal, Head – Financial Markets, India and Head – Macro Trading, South Asia, Standard Chartered Bank. “The pace of rupee depreciation could have been quicker had the central bank not intervened.”

The rupee breached its previous low of 77.93, reported on May 16, as stocks and bonds joined other asset classes, such as commodities, in losing value. Mumbai’s currency markets were reacting to the unusual dollar strength after the US published four-decade high inflation prints, stoking concerns of an impending global recession.

Dealers said the RBI was active in the forwards market to protect its forex reserves to neutralize the liquidity impact of its intervention strategy.
While all Asian currencies broadly fell against the greenback, the rupee remained one of the best performing Asian currencies, losing 0.25% versus the 0.39% drop seen in the Chinese yuan.

“The central bank is ensuring that there is no drastic drop in the rupee’s value,” said Anindya Banerjee, currency analyst, Kotak Securities. “A sudden fall can upset India’s fiscal math although the rupee cannot remain immune to overseas outflows from the emerging markets. When India is in direct competition with China for export competitiveness, a steadily falling rupee helps exporters.”

The Standard Chartered INR Real Effective Exchange Rate (REER) index, based on the RBI’s 36-currency trades, yielded 123.44 Monday compared with 117.81 nearly a year ago, clearly demonstrating the rupee’s overvaluation.

“The local unit is still relatively strong compared to other emerging market currencies and there is space for further fall in the rupee’s value,” Mittal said.

Select state-owned banks were seen selling dollars in the spot market to stem the rupee’s rout. To sterilise the spot market dollar sales, banks converted them into forwards contracts through buy-sell swaps.

This helps on two counts. First, it protects the forex reserves, which bounced back, regaining the $600-billion mark. Second, the forwards deal neutralises the impact of spot interventions on liquidity.

“The drop in forward premiums was a reflection of central bank sterilisation of spot market intervention and expectations of a faster pace of rate rises in the coming policies,” said Kunal Sodhani, AVP at Shinhan Bank.

The forward premium yields across one-month, three-month and six-month maturities fell 20-23 basis points.

A basis point is 0.01 percentage point.