RBI Support Pulls Rupee to New Lows, Helps Currency Recover Losses
After hitting a new low against the US dollar on Monday, the rupiah recouped most of its losses as market interventions by the Reserve Bank of India (RBI) in the form of dollar selling dampened the currency’s depreciation. national currency, dealers said.
The rupee hit a new low of 80.13 to the dollar in early trading as comments from Federal Reserve Chairman Jerome Powell reinforcing the central bank’s commitment to raising rates boosted the greenback on the back global scale.
But, with the intervention of the RBI to protect the rupee, the national currency ended the day at 79.97 to the dollar. The rupee had closed at 79.87 to the dollar on Friday. The RBI would have been aggressively selling USD around the 80.05-80.10 level, dealers said.
In 2022 so far, the local unit has depreciated 7% against the greenback.
Speaking at the Jackson Hole economic symposium on Friday, Powell said restoring price stability would likely require keeping policy tight for some time. The historical record strongly cautions against premature policy easing.
Given that inflation in the United States is currently at 8.5% against the Fed’s 2% target, Powell’s comments left traders all but convinced that interest rates in the world’s largest economy world should climb much higher. Economists expect the target federal funds rate to be close to 4% by March 2023 from 2.25-2.50% currently.
Higher US interest rates lead to higher US bond yields and a stronger dollar; they are also reducing global investors’ appetite for emerging market assets, such as India.
As the US dollar index headed towards the 109.50 mark on Monday – the index was at 108.20 when Indian markets closed on Friday – the rupee weakened past the all-time low of 80 06 to the dollar reached on July 19.
“The USD/INR spot closed 10 paise higher on the strong rise in the US Dollar index, following the Jackson Hole meeting. But the magnitude of the gains was capped due to aggressive intervention the RBI and a pullback in the US Dollar Index due to hawkish statements from the European Central Bank.In the near term, we expect the USDINR to move in a range of 79.60-80, 40 in cash,” said Anindya Banerjee, vice president, foreign exchange and interest rate derivatives at Kotak Securities.
Foreign exchange reserves
Since the Russian invasion of Ukraine in late February, the RBI has drawn heavily on its reserves to protect the rupee from excessive volatility as investors rushed to the safety of the greenback.
From $631.53 billion as of February 25, overall reserves fell to $564.05 billion as of August 19, according to RBI data. The central bank said earlier this month that reserves worth $573 billion were equivalent to 9.4 months of projected imports for the current fiscal year.
When RBI reserves hit a record high of $642.5 billion on September 3, 2021, the central bank said the level was close to 15 months of imports. Additionally, the net outstanding amount of RBI forward purchases of the US currency also fell sharply as the central bank took delivery of the greenback.
At the end of June 2022, the long forwards portfolio stood at $30.86 billion compared to $65.79 billion at the end of the previous financial year. Taking the forward pound into account, total reserves stand at $594.91 billion, just below the $600 billion mark, which many market participants believed was a level the central bank was willing to maintain.
However, at present, currency experts see no reason to worry about the level of reserves with the RBI which is still among the top five in the world.
“Recently, we have seen the FX pool fall as a result of central bank intervention and revaluation of reserves other than dollar investments. apart from direct intervention, there are several tools it can use when needed,” said Dilip Parmar, Research Analyst at HDFC Bank. “So far, the Rupee has been a median performer among currencies. Asian currencies and should remain less volatile than many other currencies.”
Government bonds also weakened on Monday as a sharp rise in U.S. Treasury yields following Powell’s comments eroded appetite for domestic debt, dealers said.
The yield on the benchmark 10-year paper rose 3 basis points to settle at 7.25% on Monday. Bond prices and yields move in opposite directions.
The 10-year US Treasury yield hit a high of 3.11% earlier on Monday, while the two-year yield hit its highest level in nearly 15 years, climbing to 3.4702%. Rising US bond yields are reducing the attractiveness of fixed income instruments in emerging markets.