RBI’s heavy-handed intervention
State-owned banks aggressively sold dollars on behalf of the Reserve Bank of India, leading to a sharp intraday recovery after the rupee briefly breached the 91 level. Jigar Trivedi, Senior Research Analyst at Reliance Securities, said the move was aimed at halting a one-way decline that had left the currency overextended. “The central bank’s swift action, similar to the strong interventions in recent months, was aimed at breaking the one-way decline in the rupee,” he said.
The rupee rose as much as 1% intraday, its biggest gain in seven months, as the RBI intervened through dollar selling in the local market. The move followed a series of lows in recent weeks, which had sparked debate over why the central bank had not intervened more forcefully sooner.
Traders quoted by Bloomberg said the RBI likely intervened after it bought $5 billion worth of dollars through a currency swap on Tuesday, giving it room to sell dollars in the spot market. Wednesday’s moves mirrored similar events in October when the RBI moved decisively to disrupt speculative positioning against the rupee.
The rupee’s pressure points remain
Before Wednesday’s recovery, the rupee fell almost 2% in December and was Asia’s worst-performing currency this year. The decline was driven by a stalemate in US-India trade negotiations, record portfolio outflows and continued corporate demand for dollars.Clearing house data cited by Reuters show that importer activity remained high in November while exporters remained cautious, a skew that has put pressure on the currency for months. Foreign investors have pulled about $18 billion from Indian stocks this year, adding to pressure on the rupee in addition to robust imports and uncertainty surrounding trade talks with Washington.
Trivedi said the recent losses have been “driven by portfolio outflows and continued demand for dollars, which have left the currency looking overextended,” adding that the rupee is “expected to remain under pressure until there is progress in US trade negotiations.”
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Valuation debate, soothe nerves
The sharp fall in the rupee created unrest in the markets, especially after it crossed the psychologically important 91 mark. N. ArunaGiri, CEO of TrustLine Holdings, said the episode raised fears but did not indicate a deeper rift. “With the Indian rupee briefly breaching the 91 level, an obvious question on most investors’ minds is whether this is a moment for panic,” ArunaGiri said, noting that the situation stabilized after “a quick RBI intervention.”
ArunaGiri argued that the recent move is “better understood as an adjustment rather than a structural collapse”, driven by the dynamics of capital flows, delays in the US-India trade deal and a relatively cautious stance by the RBI, rather than a deterioration in macro fundamentals in India.
According to ArunaGiri, the Real Effective Exchange Rate metrics suggest that the rupee is now trading closer to its fair value, indicating stabilization rather than a disorderly decline. “From here on out, the balance of probabilities points towards stabilization and normalization, rather than a disorderly decline,” ArunaGiri said.
The strength of the dollar limits profits
While the RBI’s aggressive intervention has eased immediate pressure on the rupee, analysts warned that further gains may remain limited until there is clarity on trade talks with the US. A broadly stronger dollar continued to weigh on most Asian currencies on Wednesday, with the dollar index rising almost 0.4% to around 98.6, Reuters said.
For now, the central bank’s message was unmistakable: speculative bets on an uncontrolled fall in the rupee will be met with violence.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of Economic Times)
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