RBI’s dollar sales, robust swap inflows lift rupee to 10-week high | Finance News

The rupee appreciated to a 10-week high on Thursday, as robust dollar inflows through the Reserve Bank of India’s special FCNR(B) swap window lifted sentiment, along with the central bank’s more active intervention in the foreign exchange market, dealers said. The RBI’s special swap measures mobilised a higher-than-expected $136.4 billion in foreign currency inflows till 31 August.

 

The local currency settled at 94.49 per dollar, its strongest close since June 25, compared with the previous close of 94.98. During the session, it touched an intraday high of 94.27 per dollar. The rupee has gained more than 1 per cent in the last one week, making it one of Asia’s best-performing currencies.

  

Market participants said the dollar inflows have strengthened the central bank’s hand in managing pressure on the rupee at a time when elevated crude oil prices and rising global bond yields have weighed on emerging-market currencies.

 

In the early stages of the FCNR(B) scheme, the currency’s appreciation through that phase remained muted due to the stronger influence of global factors on the local currency.

 

However, dealers said the RBI has since stepped up direct intervention in the spot market in order to contain volatility in the exchange rate.

 

“There is a shift from a hands-off approach to active spot intervention, rather than the swap-related inflows alone, that is now seen as the more immediate force in rupee appreciation,” said a dealer at a state-owned bank.

 

India’s foreign exchange reserves, which had already risen to a record $729.3 billion in the week ended August 28, are expected to climb further as the inflows are absorbed. However, the RBI’s forward dollar position is also at a record $137 billion and could rise further, a build-up that may cap the scope for sharp rupee appreciation ahead.

 

Market participants now expect the RBI to begin taking delivery on some of its forward dollar positions, rather than continuing to roll them over. Traders said this shift, if it materialises, could see the rupee trading in a 94 per dollar-95.50 per dollar range in the near term, with several dealers pencilling in a move towards 95.50 as the central bank recalibrates its intervention strategy between the spot and forward markets.

 

Further, focus will now shift to the bunching of maturities under the three-year and five-year FCNR(B) deposits, with a portion of the existing foreign exchange reserves potentially earmarked against these liabilities, said market participants.

 

“A portion of the existing reserve stock could be earmarked against these liabilities, helping to mitigate concerns that deposit maturities or debt repayments could trigger a sharp increase in dollar demand and exert pressure on the FX market down the line. In the near-term, priorities will be to manage liquidity, gradually lower the sizeable forwards book, and support the domestic currency. Long-end yields continue to be influenced by the hardening global yields,” said DBS in a report.

 

Market participants said that the RBI is likely to use its foreign exchange reserves cautiously and intervene selectively, as using up a large part of its reserves at current levels could leave it with limited room to replenish dollars if Brent crude remains elevated for an extended period.

 

“We believe the RBI may be judicious in the way it uses FX Reserves and may intervene sparingly because if it exhausts a lot of ammunition at the same spot level and Brent stays elevated for longer, it would find it difficult to recoup the Dollars,” said Abhishek Goenka, founder and chief executive officer of IFA Global.

 

The strong inflows have resulted in a surge in banking system liquidity, which weighed on overnight money market rates. The net liquidity in the banking system was at a record surplus of Rs 9.7 trillion on Wednesday, the latest data from the RBI showed. The previous high was Rs 9.2 trillion in September 2021.

 

Consequently, the overnight weighted average call rate (WACR) — which is the operating target of monetary policy — fell below the Standing Deposit Facility (SDF) rate to settle at 4.95 per cent, against the previous close of 5.02 per cent.

 

The SDF rate, which currently stands at 5 per cent, is the interest rate at which banks park their surplus funds with the RBI without providing collateral. It forms the lower bound of the RBI’s policy corridor, with the repo rate in the middle and the marginal standing facility (MSF) rate at the upper bound.

 

Market participants expect the RBI to rely on a mix of variable rate reverse repo operations and a possible incremental cash reserve ratio increase, even as an anticipated pick-up in currency in circulation during the festive season and continued forex intervention help drain part of the surplus on their own.

 

“We expect a mix of continued variable reverse repo rate operations (VRRRs), and an incremental cash reserve ratio hike (ICRR) to be deployed; concurrently, an increase in currency in circulation in the festive period (Sep-Nov) and FX interventions will also take out liquidity. We do not expect permanent liquidity absorption tools such as CRR hike (without a sunset clause), OMO sales, MSS or a policy rate hike in October,” Barclays said in a report.

 

The central bank conducted two VRRR auctions on Thursday worth Rs 7.5 trillion. Banks parked Rs 5.53 trillion against the notified amount at a weighted average rate of 5.24 per cent.