The rupee strengthened on Tuesday from a near record low against the dollar after the central bank stepped in with what various dealers described as massive intervention, signalling an intent to defend the beleaguered domestic currency.
Some dealers said the dollar sales via state-run banks was to the tune of $400-$500 million, and continues a pattern of aggressive interventions this month as the rupee has threatened to touch a record low of 54.30 hit in December. Traders widely believe the Reserve Bank of India is looking to defend the psychologically key level of 54, which the rupee breached early on Tuesday morning by falling to as low as 54.15 to the dollar, sparking the central bank action.
The RBI is offsetting the impact on rupee liquidity from its dollar sales by purchasing bonds via open market operations. The rupee ended at 53.79 to the dollar, above a session high of 53.5 but below its 53.9750 close on Monday.
Analysts have doubts about whether the RBI can continue to succeed in defending the rupee in the face of steep global risk aversion and a lack of confidence in India?s fiscal standing.
RBI is looking to contain any panic in the rupee by intervention and we expect this to go on ?till political developments in Europe see stability?, said Ashtosh Raina, head of foreign currency trading at HDFC Bank.
Despite the interventions, the RBI is mindful of liquidity, given the severe cash crunch in the banking system, which has sent repo borrowings to above 1 trillion rupees regularly since late April.
Its OMO announcement on Monday sent bond yields lower on Tuesday, with the benchmark 2021 bond yields ending down 2 basis points at 8.5%. The Reserve Bank of India under the Liquidity Adjustment Facility purchased securities worth R84,460 crore from 38 bids at the one-day repo auction at a fixed rate of 8%.