rupee: RBI likely to step in to stabilise rupee in forex market

Although a weakening rupee theoretically boosts India’s export competitiveness, wild swings in the currency make assessments on investment returns rather difficult, especially when India appears to be splitting ranks from global central banks on rate decisions.

“The rupee is likely to turn volatile, losing value to the dollar amid geopolitical tensions,” said Bhaskar Panda, executive vice-president, HDFC Bank. “The central bank may step in to curb any wild swings in the exchange rate ahead of the prestigious equity issuance.” Life Insurance Corp of India has filed papers to sell shares in India’s biggest initial public offering (IPO) to date.

Turmoil in Markets

All emerging market currencies are set to lose against the dollar and the pound/euro as global investors seek the safety of dollar-backed assets amid the Ukraine crisis. US President Joe Biden on Friday said Russia had decided to reject diplomatic overtures and could attack Ukraine. Russia then test-fired its missile battery on Saturday, further ratcheting up tensions.

The Bloomberg volatility index for the USD/INR pair shot up 23 basis points in just two trading sessions to close at 4.83% on Friday. During the same period, the US Dollar Index, which pegs the greenback against other major world currencies, strengthened nearly half a percentage point. One basis point is 0.01%. “Rising uncertainties on global geopolitical front have triggered risk-off sentiment, causing higher volatility in financial markets,” said Jayesh Mehta, India country treasurer at Bank of America. “Back home, RBI will be observant in the evolving situation to protect its local economy.”

Rupee Slide Expected

Last week, the rupee was the second-best performing currency among Asian peers, gaining 1.05% to close at 74.66 per dollar. Most traders expect the rupee to immediately slide at least one percentage point due to the Ukraine event risk. Erosion in the rupee’s value past a crucial level of 75.5 a dollar will likely prompt stronger central bank intervention unless the geopolitical uncertainties recede.

“Despite FPI (foreign portfolio investor) outflows, the rupee gained due to strong corporate inflows,” said Anindya Banerjee, currency analyst at Kotak Securities. “Corporates may have received either dollar funding locally, or in the shape of foreign direct investments. Exporters were also seen receiving overseas payments ahead of the fiscal year end.”Some bullish traders expect the rupee to firm up, perhaps as high as 73.80 to the dollar, on strong corporate inflows and export earnings. And that, too, should trigger robust RBI intervention.