Ahead of policy decision, RBI steps in to save rupee from hitting a new low

Currency trades in a narrow zone; ends the day at 77.71 against dollar

The Reserve Bank of India (RBI) stepped up its intervention in the foreign exchange market on Tuesday as the rupee headed for a new all-time low after a weak opening, though the currency traded in a narrow range ahead of the monetary policy review by the central bank.

The rupee opened at 77.68 to a US dollar compared to the previous close of 77.63, and went on to hit the day’s low of 77.74. According to currency dealers, state-run banks sold dollars on behalf of the RBI at around 77.70 levels. The rupee ended the day at 77.71, down 8 paise from its previous close.

“The rupee traded weak as it tried to price in the RBI's interest rate hike probability tomorrow (Wednesday). The hike is expected to be around 40 to 50 bps (basis points) according to consensus. The dollar index has also played a major part in the recent weakness witnessed in the rupee, which fell from 77.50 to 77.75 above in the past three trading sessions,” said Jateen Trivedi, analyst at LKP Securities.

Crude oil prices scaling back to the $120 per barrel level also impacted the currency, with India importing 80 per cent of its requirements.

“Despite trading above 78 levels early morning in NDF (non-deliverable forwards), onshore USDINR opened quite flat around 77.72 levels and ended yet another day within a tight range of 5 paise. The pair remains well protected below 77.80 levels amid strong selling coming from PSUs on behalf of the RBI and apparent participation by foreign banks and corporates,” said Amit Pabari, managing director, CR Forex Advisors.

The rupee hit an all-time closing low on May 19, when it ended at 77.73/$, while intra-day record low was 77.80 on May 17.
 

“Throughout the day, the rupee managed to remain well under 77.73 levels and as the onshore trade wrapped, the pair again moved above 77.80 in NDF. This clearly signifies that the RBI has held the reins of the rupee strong to avoid any unprecedented volatility amid shaky market sentiments,” Pabari said.

The central bank has beefed up its intervention in the foreign exchange market since the Indian unit came under pressure after the Russia-Ukraine war broke out in late February. There has been intervention in all three segments of the market – spot, futures and the offshore.

In April, the RBI sold $2 billion on a net basis in the spot market – a record high – which slowed the pace of currency depreciation.

The rupee has depreciated 4.34 per cent in 2022, and 2.5 per cent in the current financial year. In May, the currency depreciated 1.6 per cent against the dollar amid aggressive intervention by the central bank. RBI Governor Shaktikanta Das earlier said that the central bank did not allow a runaway depreciation of the currency.

“Surging crude prices, foreign fund outflows, broad dollar strength and firm US bonds are expected to keep the Indian rupee under pressure,” IFA Global said in a note.