The rupee on Wednesday strengthened to its highest in more than two years at 63.70 to the dollar even as two large foreign banks are understood to have sold almost a billion dollars.The currency appreciated beyond the 64 level two hours before the credit policy was announced and rose as high as 63.59 to the greenback.“The rupee has been strengthening and there has been a lot of unhedged foreign currency exposure in the market. I believe further strengthening of the Rupee would be bad news for the exporters,” said Ananth Narayan, regional head of financial markets, ASEAN and South Asia at Standard Chartered Bank.
Market participants are hinting at huge dollar selling on Wednesday by foreign banks that led to a sudden surge even before the repo rate cut was announced. “A 25 bps cut was very much factored-in in the currency and equity markets. Considering that we did not have any other dovish factors, the appreciation of the currency to such high levels was possibly because some foreign banks have sold about $1 billion triggering stop losses at 64 levels,” said MV Srinivasan, vice-president at Mecklai Financial Services. The rupee was trading close to 64.10 levels over the last two days and currency dealers had indicated that the central bank might be defending the appreciation of the currency beyond the 64 levels. As a result, market participants are believed to have taken long dollar positions with stop losses close to 64 levels.
“As two foreign banks sold a huge quantity of dollars on Wednesday, it is believed that these stop losses got triggered which not only took the rupee below the 64 level but also led to further short positions. As a result, we suddenly saw the currency rise to such high levels,” said a currency trader.
Inflows into the Indian debt and equity markets had been the key reason for the appreciation of the rupee so far. According to latest depository data, foregin portfolio investors (FPIs) have put in a record $17.510 billion into Indian debt and have infused $8.895 billion into equities. Currently, FPIs have fully utilised the investment limits in central government securities and corporate debt. Prior to Wednesday, the rupee had hit a closing high of 63.58 to the dollar in July 2015 and had hit a two-year intraday high of 63.51 in the same month. The one-month non-deliverable forwards (NDF) on Wednesday touched 63.86 while the three-month NDF had hit 64.25.