The huge gains of the Indian rupee over the past three sessions are sparking rumors that the Reserve Bank of India may have loosened its grip on the currency.
The rupee has recovered 1.6% in the previous three sessions to record its biggest gain for the period since March 2020. The exchange rate had been moving within a range of 74-75 per
in the last two months. It rose to its strongest level since June on Wednesday. The RBI has previously said that its currency interventions are aimed at defusing volatility. However, traders believe that the central bank has been sucking up large amounts of dollars to prevent the rupee from being swayed by a series of equity sales and debt issuance by companies.
Now, the currency rally is fueling rumors that the RBI could be retreating, as excess rupee liquidity resulting from these trades could fuel inflation.
Part of the RBI’s “non-intervention foreign exchange strategy” in August could be attributed to preventing the excess liquidity situation from being exacerbated by its intervention in the foreign exchange market, said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd. The central bank is also considering making some profit from the rupee’s gains for its own books, he said.
RBI comments on Tuesday support this argument. Governor Shaktikanta Das said the central bank plans to conduct more operations to manage any unexpected increases in cash from the banking system due to inflows. The RBI did not immediately comment when contacted Wednesday.
Still, traders are reluctant to push bullish bets on the rupee, as previous episodes of this kind have been short-lived, and the RBI quickly returned to rack up dollars.
“The RBI is allowing the rupee to appreciate in line with global markets,” said Anindya Banerjee, currency strategist at Kotak Securities Ltd. “However, the RBI may not allow strong gains beyond 72.50 per dollar”.
The rupee was up 0.1% to 72.9725 on Wednesday. It is the best performing currency in Asia this quarter with gains of almost 1.9%.