The Indian rupee has seen massive depreciation against the US dollar since the beginning of February when a heavy sell-off was witnessed in the domestic equities following the global trend while the home currency has breached the peak levels of 66, 67 and 68 per US dollar in the last one-and-half-month only. The steep dip in the Indian rupee is largely due to ballooning crude oil prices, foreign investors dumping equities, strengthening of US dollar against a basket of major currencies and increase in the trade deficit.
Earlier on Tuesday this week, the rupee crossed the level of 68 apiece US dollar, falling by 56 paise in a single day possibly on the back of FPI’s selling pressure, the continuous surge in crude oil prices coupled with the cliffhanger outcome of Karnataka Elections 2018. During the day when Karnataka Assembly elections results have been announced, the rupee’s movement was mostly in sync with the trends of results. For instance, the rupee went up against US dollar when Modi-led BJP seat count crossed the halfway mark in the mid-morning session but later on, the home currency plunged heavily after BJP (Bharatiya Janata Party) failed to clinch the majority.
Surprisingly, just a day after rupee crossed 68 per US dollar mark, it made a sharp recovery of as much as 27 paise after touching a fresh 16-month high of 68.15 on Wednesday. Earlier on Tuesday this week, the rupee dropped 56 paise to close at 68.07 against US dollar versus a close of 67.51 on Monday.
While, on the other hand, the Indian rupee has been appreciating for the last two days from Wednesday against the US dollar. The rupee has gained 50 paise in the last two days to 67.57 (nearer to Monday’s closing of 67.51/$) at the interbank foreign exchange market.
Here are the two key reasons for rupee’s upmove
On Wednesday, 16 May 2018, the rupee made a sharp rebound versus US dollar and closed 27 paise higher. The considerable appreciation in the domestic currency is due to the Reserve Bank of India’s intervention. According to a Reuters report, PSU banks sold US dollars around a level of 67.67 on a suspected intervention by the RBI. “The central bank likely sold dollars via state banks at 67.67 level to stem the rupee fall, Reuters reported citing unidentified dealers. As per a Bloomberg report, the state-owned banks sold dollars, probably on behalf of the central bank.
“Even as political uncertainty continued to roil equity markets, rupee resisted weakness on the expectations of dollar selling by RBI, having tested 68,” PTI reported citing Anand James, Chief Market Strategist, Geojit Financial Services.
The Reserve Bank of India has maintained its reference rate for rupee per US dollar below the level of 68. On Thursday, the RBI fixed a reference rate of 67.7156 against the US dollar. Earlier on Wednesday, Tuesday and Monday, the reference rate for Indian rupee per US dollar was 67.8276, 67.5288 and 67.3153, respectively.
RBI’s Rs 10,000 crore GSec purchase
Today only, the Reserve Bank of India carried a massive purchase of government securities amounting to not more than Rs 10,000 crore. “The Reserve Bank has decided to conduct purchase of Government securities under open market operations for an aggregate amount of Rs 100 billion on May 17, 2018 (Thursday) through multi-security auction using the multiple price method, RBI said in a statement on 4 may 2018. There is an overall aggregate ceiling of Rs 100 billion for all the securities in the basket put together. There is no security-wise notified amount, RBI statement says.
Under the open market operations, the RBI was set to purchase 8.12% GS 2020 10 December 2020, 6.84%; GS 2022 19 December 2022, 7.72%; GS 2025 25 May 2025, 6.79%; GS 2027 15 May 2027 and 8.24% GS 2033 10 Nov 2033. The huge purchase seemed to increased buying of INR resulting in more strength to the domestic currency.
Concern on Indian rupee
According to a Reuters poll, investors have turned bearish on most of the Asian currencies in the last couple of weeks due to strongness in US dollar led by the rise in US bond yields. Investors have short positions in Indian rupee ar the highest level in 9 months, the report said. “Bearish bets on the Indian rupee climbed to their highest level since August last year, the poll of 10 respondents showed, with sentiment further soured by rising oil prices, which will add to the country’s already widening trade deficit,” Reuters report added.
Meanwhile, crude oil prices have been boiling continuously with Brent crude inching very near to $80 per barrel. As per the latest data available on Thursday, up until 3:15 pm (IST), Brent crude made a 3-1/2 year high of 0.79% at 79.91 while WTI crude surged 0.98% to a similar peak of 72.19. Brent was “now threatening to break through $80 per barrel … (as) geopolitical risks continue to support prices, (and) an unexpected fall in inventories in the U.S. got investors excited,” ANZ Bank was quoted in a Reuters report.