The rupee staged a sharp comeback against the dollar on Thursday, logging its strongest single-day gain since 2013, after the Reserve Bank of India (RBI) stepped up measures to curb speculative positions against the domestic currency.
The rupee surged to an intraday high of 92.82 per dollar, rebounding from its record low of 95.21 in the previous session. It eventually closed at 93.18, up 1.52 per cent from the prior close.
The magnitude of the rally harks back to the aftermath of the 2013 US ‘Taper Tantrum’, when RBI, headed by then governor Raghuram Rajan, had intervened through a subsidised swap facility for banks to raise foreign currency deposits.
This move brought in around $26 billion in just three months and helped break speculative pressure on the rupee.
RBI tightens rules
The RBI has rolled out two rounds of measures to stabilise the rupee, which had depreciated nearly 4 per cent in March amid weak external fundamentals, including foreign fund outflows and elevated crude oil prices.
Last Friday, the central bank capped banks’ net open rupee positions at $100 million, replacing the earlier limit of up to 25 per cent of capital. On Wednesday, it barred banks from offering rupee non-deliverable forwards (NDFs) to both resident and non-resident clients seeking to profit from arbitrage opportunities between onshore forward rates and offshore NDF markets.
According to industry estimates, sizeable positions of around $30-40 billion of arbitrage exposure are outstanding. The unwinding of these positions is expected to trigger significant dollar sales in the domestic market, supporting the rupee’s recovery, though it could leave banks exposed to trading losses.
“RBI seems quite serious about following through on new regulations to control rupee weakness,” said Michael Wan, senior currency analyst at MUFG, adding that further policy steps from both the central bank and the government cannot be ruled out.
Siddhartha Khemka, head of research, wealth management at Motilal Oswal Financial Services, said that while the rupee’s sharp rebound reflects the impact of RBI’s intervention to curb volatility, underlying pressures remain. “Elevated crude prices, geopolitical risks and persistent foreign outflows may limit sustained appreciation,” he said.
The RBI’s actions come against the backdrop of declining foreign exchange reserves, which fell below the $700-billion mark to $698.34 billion in the week ended March 20.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, however, said there is merit in proactive intervention. “There is no reason to suggest that we should use fx reserves for rainy days only and we believe that there is still time to intervene in the market to prop up the rupee if it is so desirable,” he said.