India’s rupee extended gains as the central bank widened currency curbs to support the rupee, which faces pressure from high oil prices and foreign outflows.
The rupee outperformed Asian peers Tuesday, rising as much as 0.8 per cent to 95.01 per dollar, following Monday’s 1 per cent gain, as the Reserve Bank of India extended curbs on certain types of derivative transactions to avoid pressuring the currency.
“The negative bias for the rupee has turned, at least for now,” said Dilip Parmar, currency analyst at HDFC Securities. The accelerated strength in the currency is being driven by an unwinding of positions that were earlier exerting strain on the rupee, with liquidity also thinner, he said.
The range for now is 95.10-96 per dollar, he said, adding that a break on the stronger side could take the currency to 94.50. FOLLOW MARKETS LIVE UPDATES
The central bank backed up its regulatory measures with currency-market interventions that further boosted the rupee’s gains on Tuesday, according to traders familiar with the developments. The currency is still down more than 5 per cent this year, ranking as one of Asia’s weaker performers.
The series of regulatory interventions over the past few days highlight the RBI’s resolve to rein in the rupee’s weakness after its first interest-rate increase in nearly four years did little to alter the currency’s course. It also shows that elevated oil prices and persistent foreign outflows from local stocks are keeping policymakers on guard against further depreciation.
Late Monday, the RBI said that banks with operating units in the International Financial Services Centre can only offer offshore rupee-linked derivatives to non-residents for the purpose of hedging. It also widened the scope of a newly-introduced foreign-exchange risk reserve, making it applicable for banks’ own assets and liabilities.
The moves add to steps taken over the weekend, including a special window for oil firms’ dollar demand and broad restrictions on derivatives markets. These represent the strongest rupee-defense measures taken by the RBI since the 2013 taper tantrum episode, with the currency marking fresh several lows over the past year.
“Currency-market arbitrage has anyway been pretty much neutralized and the fresh restrictions are another step in that direction,” said Kunal Sodhani, head of treasury at Shinhan Bank in Mumbai, referring to transactions where traders profit from price differences in the onshore and offshore markets.
“These measures are primarily designed to manage market behaviour and volatility,” he said.
Still, there are some who forecast further weakness for the rupee. The currency will gradually weaken to 97.5 per dollar by the September quarter next year, Michael Wan, senior currency analyst at MUFG Bank in Singapore, wrote in a note.
