MUMBAI, May 21 (Reuters) – The Reserve Bank of India reverted to its familiar intervention strategy on Thursday, deploying heavy dollar sales via state-run banks before market open to halt a persistent slide in the rupee after a string of all-time lows, three bankers said.
The rupee surged on the interbank order matching system to near 96 against the U.S. dollar following heavy intervention, with the currency rallying by about 70 paise within minutes.
It opened at 96.30 in the onshore spot market, up 0.5% on the day. The central bank’s pre-open intervention mirrored past episodes where it has acted aggressively to break a negative feedback loop of persistent depreciation and mounting pressure on the rupee.
The currency fell to within a whisker of 97 on Wednesday.
The RBI last deployed this strategy in March and has, at times, intervened heavily either before market open or shortly after. The rupee, on the interbank order matching system, rallied to a peak of 95.30 before trimming gains. A large state-run bank offloaded dollars aggressively, a trader with private bank said.
The move comes after days of the RBI selling dollars across levels to support the rupee without targeting a specific line in the sand. Despite this, the currency has stayed under pressure, losing around 2.5% over the last nine sessions and repeatedly hitting new lows.
The central bank appears to have concluded that its steady intervention was having limited impact, with the rupee continuing to weaken “no matter what,” a treasury official at a private sector bank said.
The intervention alongside recent price action in the rupee suggests that there might have been a build-up of speculative positions, he added.
The RBI’s stated policy is to intervene only to manage volatility and not to defend specific levels.
OIL, U.S. YIELDS PRESSURE RUPEE
The sustained surge in oil prices triggered by the Iran war has clouded India’s macroeconomic outlook, piling pressure on the rupee.
Economists have marked down growth forecasts for the economy, lifted inflation projections and are forecasting persistent pressure on the rupee, with some warning that India could face a third consecutive year of balance of payments deficit.
The rupee could, therefore, stay under pressure amid sustained dollar demand from higher oil imports to secure supplies, as well as sizeable equity outflows driven by heightened risk aversion, BofA Global Research said in a note on Wednesday.
The recent rise in U.S. yields due to oil-driven inflation worries has also added pressure on the currency.