Over the last one week, we have seen the Indian rupee traverse within the range of 59.50/70 and 60.40/50 levels to the US dollar on spot. RBI has shown strong resolve to procure US dollars from the market, evident from the sharp uptick in the FCY reserves. At the same time, RBI has disallowed FIIs from investing in short term govt. debt, which means, from now on, Indian rupee would be all the more dependent on the inflows into the equity markets.
On Monday, the local unit had opened stronger, on the back overnight sell-off in the offshore markets. Offshore continues to drive the Indian rupee and sets its value as onerous regulations in the domestic markets prevents price discovery.
Indian rupee traded to a day's high of 59.78/79 before reversing course on the back of sell-off global and domestic equity markets. The pair closed around 60.10/11 on spot, after touching a high of 60.22/24 levels on spot. Importer demand and the invisible hand of the sovereign supported the Greenback.
Over the near-term, we can see the pair oscillate between a range of 59.30/50 and 60.50/70, as central bank intervention and FII interest keeps the local unit bracketed.
Overnight, SEBI announced measures to reduce margins on exchange traded currency derivatives segment. We welcome the step. However, we hope that a full restoration of the previous norms will happen. Over the last few years, a number of onerous regulations were put in place on exchange traded segment. As our central bank governor has emphasised in his speeches that there is a for liquid and deep multi asset financial markets, a step in that direction can be to make regulations non-prohibitory and less complicated. We hope that position limits are relaxed and also banks are allowed to participate actively in the exchange traded market. FIIs have just been allowed to hedge their exposure in the ETC. Therefore, in order to allow for deep and liquid exchange traded FX market there has to be ample scope from domestic participants, hedgers, speculators and arbitragers, to also participate actively in the ETC markets.
By Anindya Banerjee, analyst, Kotak Securities