The biggest buyers of the day were state-owned banks, who were looking to buy dollars when USD-INR was at the 64.60 level.
The rupee appreciated by 2 paise against the dollar on Thursday to close at 64.56, having recovered from an intraday low of 64.72.
Dealers said that one of the major factors for the recovery was a group of custodian banks selling dollars towards the end of the session. According to them, around USD 450 million was sold by these custodian banks.
The biggest buyers of the day were state-owned banks, who were looking to buy dollars when USD-INR was at the 64.60 level. A dealer with a Japan-headquartered bank said the purchases were in all likelihood for the Reserve Bank of India and not for importers of oil and other commodities.
“You can say this was possibly an intervention of sorts. Typically, when the RBI intervenes, it will push the dollars to the forward market. But today that did not happen, which means that it could either be to accumulate or to pass on to the government or oil manufacturers,” the dealer said.
The RBI set a reference rate of 64.63 on the USD-INR pair on Thursday, close to 10 paise higher than the corresponding rate on Wednesday. The dollar index, which measures it against a basket of six currencies, was hovering around 99.58, 15 points lower than its previous close.
The rupee has appreciated by around 5 percent since the beginning of the calendar year. The primary driver for this rally has been increased foreign portfolio investment in Indian capital markets. In all, FPIs have invested around USD 6.5 billion in domestic equities and around USD 7 billion in debt in 2017.
Meanwhile, the 10-year benchmark bond yield went up by 2 basis points to 6.88 percent on Thursday. The imminent introduction of the new 10-year benchmark bond, which is expected to happen sometime over the next couple of weeks, has been weighing on the price of the current benchmark for the last few weeks. Bond yields and prices move in opposite directions.
“As Indian bond yields keep rising, it should keep attracting foreign investors given the attractive carry available,” said Arvind Chari, Head – Fixed Income and Alternatives at Quantum Advisors. “We saw significant foreign buying in February and March when 10-year bonds yields rose towards 6.90 percent. Their activity has been muted in the last two weeks though.”Chari added that the Indian bond market is getting bigger and it will continue to attract even larger investments from foreign investors who remain significantly underinvested to Indian bonds.