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Informist, Friday, Oct. 11, 2024

 

By Pratiksha and Kabir Sharma

 

NEW DELHI – The Reserve Bank of India finally allowed the rupee to fall past the 84-per-dollar mark after defending the level for the last two months. With this, the Indian currency broke a psychologically-crucial level against the greenback after almost two years.

 

The central bank had been steadfast in protecting the key level by intervening in both the domestic spot and offshore non-deliverable forwards market since August. So much so that the RBI also deployed 'verbal intervention' twice since August, asking banks to avoid betting aggressively against the rupee.

 

However, even though the Indian unit has overcome so much opposition to break the key level, market players do not see the breach as a harbinger of exchange rate volatility. This is in contrast with earlier instances when all bets would be off once the rupee managed to cross over a key level. The key difference is the RBI's current intervention strategy, under which low volatility is the new norm and key levels are mere incidental milestones in the rupee's journey of orderly depreciation.

 

Apart from preventing the 84-per-dollar mark in the recent past, the central bank has since last year pushed volatility in the exchange rate to extraordinarily low levels through its active interventions. And market participants expect the RBI to continue doing the same.

 

The average daily trading range for the rupee against the US dollar has been just 10 paise since September 2023, down from 22 paise in the preceding 12 months. The standard deviation, a measure of volatility, has fallen to 1.0% from 2.5%. Case in point: On Friday, after the rupee fell past the 84-per-dollar mark, it fell further to only 84.07 a dollar during the day as the apex bank maintained a tight grip. The last three psychologically-important figures, once breached convincingly, caused at least a 20-25 paise of further fall in the rupee. In fact, the journey from 81 a dollar to 83 a dollar took only 26 days for the local unit.  

 

"There was barely any movement after the figure (84 a dollar) broke," said a senior treasury official at a big state-owned bank. "All this anticipation for nothing! The muted movement (in the rupee) will continue."

 

Market participants pointed out that the central bank has enough foreign exchange reserves to continue keeping the Indian unit from depreciating sharply and curbing excessive volatility. India's foreign exchange reserves have risen above the $700 billion mark and were near a record high of $701.18 billion in the week ended Oct. 4. 

 

"See historically, when the rupee would break a big figure, it would already be on a depreciating trend and reserves would also be falling, but right now, the reserve levels are more than adequate," said a treasury head at a foreign bank. "So the gradual depreciation theme will continue. No sharp moves."

 

When asked why the RBI had not allowed more volatility in the rupee, RBI Governor Shaktikanta Das had said in an interview to CNBC in September, "If you allow volatility, whom does it benefit? It does not benefit the economy. So why would we allow volatility?" He clarified that while fluctuations in exchange rates are natural, excessive volatility would be damaging.

 

Going ahead, market participants expect the Indian unit to depreciate against the dollar, albeit in an orderly fashion. "The theme of a sluggish rupee will continue; the RBI will ease volatility but the levels at which it stabilises the rupee will be guided by global factors, mostly," said Dhiraj Nim, FX strategist at ANZ Banking Group.  

 

The odds seem to be tilted against the Indian unit in the near term, with the escalating geopolitical tensions in West Asia hitting investors' risk appetite. So far in October, FPIs have net withdrawn almost $5.8 billion worth of funds from Indian markets.

 

Further, investors' reallocating funds to China after the country's announcement of a slew of fiscal stimulus measures to support its economy, may also keep the Indian unit under pressure. The upcoming US presidential elections, where the two top candidates are tied in a neck-and-neck contest, may also be a source of volatility for the Indian unit.

 

While the depreciation-bias for the rupee is likely to be intact going ahead, market participants are not looking at the next big-figure--the 85-per-dollar mark--to break in the near future. Only because the central bank will continue to be the dominant player in the currency market.  End

 

US$1 = INR 84.06

 

Edited by Akul Nishant Akhoury

 

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