RBI intervention helps rupee post biggest one-day gain in a month to close at 89.23
MUMBAI: After Friday’s mayhem when the rupee had its worst single-day fall since May 8, plunging to a new low of 89.61, strong RBI intervention propped the beleaguered rupee Monday, helping it post the biggest one-day gain in a month at 89.23, even as traders expect the currency to fall more in the near term.
The rupee ended the day at 89.23 against the dollar, up 0.3% from its close at 89.48 in the previous session, when intra-day it had hit an all-time low of 89.61. Still the unit is down 4.3% year-to-date and the rupee faces a precarious trajectory.
“The rupee faces a precarious trajectory, seeming inevitably drawn towards the 90-threshold, aggravated by the foreign capital outflows, uncertainty over Indo-US trade deals and an expanding trade imbalance,” Dilip Parmar, senior research analyst at HDFC Securities, told TNIE.
Furthermore, the underlying technical strength of the dollar presents a formidable headwind for the rupee, placing an additional burden on it, he added.
“In the coming quarter, we expect the rupee to trade between 87.50 and 90 with positive bias,” Parmar said.
However, most experts are of the view that the current rupee pain is temporary and a possible Indo-US trade deal will help it stabilise to such an extent that the currency may trade in the 88 level, clawing back as much as 100-125 paise from the present lows. But if the trade deal is not favourable or indefinitely delayed, the rupee is set to plunge to 90 or even below, they warn.
Though the central bank intervention blunted the immediate pressure on the rupee, traders anticipate a continuing downward trend for it in the absence of a breakthrough in US-India trade negotiations.
The Reserve Bank likely intervened before the spot market opened, and intermittently thereafter, helping the currency hold above its all-time low, traders said.
"The RBI may have thought it more prudent to conserve ammunition and intervene at higher levels instead of going all in at 88.80 itself," forex advisory firm IFA Global said in a note which has a bearish outlook on the currency, expecting it to hover in the 88-89.50 range over the next six weeks.
The uncertainty over a trade deal with the US has hurt trade and portfolio flows into the country, exerting pressure on the currency even as the domestic economy remains resilient. Another reason is continuing outflow from equities, with foreign investors dumping domestic equities throughout the year, having taken out almost $17 billion so far this fiscal.
Another trader said the continuing strengthening of the dollar index, which was down modestly at 100.1 today, also led to pain for the rupee which remains the worst laggard among its Asian peers.
“We think the combination of promising Ukraine peace talks and the Beige Book (a qualitative report published eight times a year by the US Fed summarizing current economic conditions across the 12 Federal Reserve districts, and is considered a valuable resource for the Federal Open Market Committee when making monetary policy decisions) poses downside risks to the dollar this week," analysts at ING said in a note.
The pressure on the rupee also comes from the month-end demand for the dollar. However, the sharp fall came against an otherwise calm global backdrop, puzzling traders and intensifying focus on the currency market.
According to CR Forex Advisors, the rupee fall stands out because global cues are nearly flat, the dollar index is nearly steady, and so is crude, and even emerging-market currencies show no stress.
“Thin dollar supply and aggressive buying create a liquidity gap,” the firm notes, adding the RBI, which had been quietly defending the rupee at 88.80, appeared to have stepped aside, triggering stop-loss orders and an exaggerated move.
A steep rupee slide usually filters into the equities too, said Rahul Kalantari of Mehta Equities, adding “a record-weak rupee creates risk-off sentiment in the equity market as investors worry about higher imported inflation, rising corporate input costs, pressure on margins of import-dependent sectors.”
In contrast, VK Vijayakumar of Geojit Investments believes the rupee depreciation is “unlikely to impact the market significantly” at this stage, especially since valuations have cooled. With the weakening of the AI trade globally, FPIS are going to be buyers soon, potentially helping the currency stabilise.
While currency weakness historically triggers FII caution, the reaction this time may be more nuanced, according to Vijayakumar who also believes foreign investors, having worried more about valuations than the rupee, may return as earnings visibility improves.