FII selling exerts pressure on Indian currency
Mumbai: The Reserve Bank of India’s (RBI) aggressive intervention in the forex market over the last two days helped the rupee record its steepest single-day recovery in nearly two years despite a rising dollar index.
The central bank has been aggressively intervening in the foreign exchange market over last two days by selling dollars in the spot and the forward markets and according to traders it has sold around $4 billion on Monday and around a similar amount on Tuesday to support the rupee which has been struggling due to portfolio outflows and uncertainty on US trade tariffs.
The rupee on Tuesday rallied 63 paise, recording its steepest single-day recovery in nearly two years, to settle at 86.82 against the US dollar, backed by dollar selling by banks. It had made a fresh low of 87.95 versus the dollar on Monday. The sell-off was triggered by the risk-off sentiment after the US President Donald Trump announced a 25 per cent tariff on steel and aluminium imports.
The rupee has depreciated by 3.94 per cent in the current financial year, whereas in the current calendar year, it has witnessed 1.40 per cent depreciation. In February, the rupee is down 0.24 per cent against the dollar so far.
The rupee’s recovery comes despite a strengthening US dollar index, which climbed from 107.70 on Friday to 108.40 on Tuesday amid broader weakness among other Asian currencies. The dollar index measures the strength of the greenback against a basket of six major currencies. Ritesh Bhansali as Deputy Chief Executive Officer, Mecklai Financial Services, “The RBI intervention started yesterday. It was also present in the morning intervening in the forex market through public sector
banks which also led to unwinding long dollar positions. According to market estimates, the RBI has sold around $ 4 billion. As a result,
from yesterday’s low of 87.96, the rupee touched a high of 86.55 which is an appreciation of Rs 1.30.”
“At the macro level there is no fundamental change so we expect the rupee to continue to remain under pressure till the time this uncertainty around the tariff wars is resolved. The maximum we are expecting on the downside is 86.30 level for the next one month and on the upside it could test 87.50 level,” added Mecklai.
According to reports, there could be two key motivations behind RBI’s move. First, the intervention could be aimed at encouraging exporters to convert their dollar earnings into rupees, boosting forex inflows at a time when export activity traditionally rises, Secondly, the central bank would be aiming at containing speculative trading that has led to sharp fluctuations in the rupee’s value.
