RBI steps in to halt major movements in weakening Indian rupee against US dollar: currency experts

Indian rupee

The Reserve Bank of India (RBI) has initiated its routine interventions in the forex market to halt major movements in Indian rupee, which has fallen to a record low, according to currency experts.

The central bank swung into action after the rupee closed at an all-time low at 84.11 against the US dollar on Monday (November 4).  The depreciation is being attributed to the slide in Indian equities over the past month amid massive outflows by foreign portfolio investors (FPIs) and a rise in crude oil prices due to geopolitical tensions in the Middle East.

“The RBI seems to have been intervening to protect the rupee from further depreciation as FPIs are continuing with their onslaught on equities and buying dollars to send back home,” said Anil Kumar Bhansali, Head of Treasury and Executive Director at Finrex Treasury Advisors LLP.

Kunal Sodhani, Vice President, Shinhan Bank, weighed in on the RBI's corrective measures. Typically, he pointed out, the central bank ensures foreign exchange reserves hold a steady line in the face of excessive volatility in both the capital and currency markets. External factors often lead to the weakening of rupee.

The rupee has been trading over 84-plus against the US dollar for over a month amid growing FPI outflows triggered by the US Presidential election on November 5 and better equity returns in other capital markets, among other factors.

According to the Bloomberg data, Indian rupee traded in the range of 83.9987 to 84.1212 against the greenback between October 11 and November 5.

October witnessed an outflow of Rs 94,017 crore from equities, while November also started on a dour note. So far in November alone, the outflows are to the tune of Rs 4,344 crore, as per the data compiled by National Securities Depository Limited (NSDL). And these massive outflows has been exerting pressure on the  rupee.

To make matters worse, a sharp surge in US treasury yields following the US Federal Reserve's decision to cut the benchmark interest rate by 50 basis points (bps) in September also precipitated the FPI outflows from debt.

Yield on the US Treasury notes have surged by 61 bps, which drastically narrowed the spread between Indian and US government notes, making the latter much more attractive for foreign investors. Concerns over macroeconomic fundamentals in US  have been allayed, as unemployment rate remained steady at 4.1 per cent. The data indicates a still healthy labour market in October, despite disruptions from natural calamities such as hurricanes and a strike at Boeing, which has since been called off. Speculation is also rife that the US Federal Reserve may further cut the benchmark interest rate by another 25 bps next month, irrespective of the Presidential poll results, which appear too close to call at this point in time.

The rupee continues to remain volatile, which is evident from the dip in India's forex reserves in the last four weeks. As per the RBI’s data, forex reserves dipped $3.463 billion during the week ending October 25.  Total reserves were $684.805 billion.

Sodhani said that softening of US dollar amid disappointing job market data for October could provide some support to the rupee. However, Republican candidate Donald Trump's victory over his Democratic rival Kamala Harris in US Presidential election could further strengthen the greenback against the weakening rupee.