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Informist, Thursday, Mar. 27, 2025

 

By Pratiksha

 

NEW DELHI – The rupee's substantial rise against the dollar recently has caught currency market players off guard as most expected the Reserve Bank of India to make the most of this rare opportunity to recoup its foreign exchange reserves. The central bank, however, was missing in action and allowed the rupee to surge almost 2% against the greenback this month and recover all of the losses the Indian currency has incurred in 2025. 

 

The rupee soared during Mar. 12-24, rising past the psychologically-crucial mark of 87 and 86 per dollar, as the dollar index slumped and exporters sold dollars for conversion of their foreign exchange-denominated earnings into rupees before closing their books for the financial year ending March. 

 

Not only did the RBI forego the chance to rake in a significant quantum of dollars, it also risked sending the rupee deeper into overvalued territory as it emerged as the best performing currency in Asia.

 

"It's pretty unexpected, I mean the consensus was that the RBI will buy on the dips (in dollar/rupee) because they have to recoup a part of their reserves but now looking in the hindsight I can think of a couple of reasons why this may have happened," said Dhiraj Nim, an economist and FX strategist at ANZ Bank India.

 

Market participants pointed out that the central bank seems to be replicating the hands-off approach it followed towards the rupee's depreciation during Jan-Feb. Case in point, after falling past the 86-per-dollar mark for the first time on Jan. 13, the rupee declined past the 87 mark in just a matter of three-weeks.   

 

The theory most commonly voiced by currency traders is that the RBI allowed the rupee to rise sharply in order to discourage a build-up of speculative bets against the domestic currency. The RBI's earlier intervention strategy under which the central bank bought buy dollars at the slightest instance of rupee appreciation was often criticised for encouraging bets against the Indian currency. If one is sure that the RBI would not allow the rupee to gain sharply, speculating against it becomes a no-loss trade. It is precisely this kind of trades that the central bank may be looking to stamp out, dealers said.

 

"The RBI, I believe, has somewhat successfully instilled the sense that they want a two-way trading of the rupee. They're not comfortable with one-sided bearish bets or one-sided bullish bets. They kind of have maintained a good rate in which the rupee has fluctuated," Nim said.

 

Market participants said that the central bank may also have allowed appreciation in the Indian unit owing to the uncertainty around the next round of tariffs by US President Donald Trump next week. Trump will disclose the specific details of reciprocal tariffs he plans to implement next Wednesday.

 

"I think we can't ignore the timing of this (appreciation in rupee). Of course March is seasonally a good month, but they (RBI) usually use this time to fill their forex kitty," said a senior treasury official at a state-owned bank. "I think they just didn't want to touch the exchange rate before the whole tariff drama unfolds in April. They wanted to play it safe."

 

Further, some market participants said that the central bank may not be desperate to add to its dollar kitty as its foreign exchange reserves are likely to get a near-term boost from revaluation gains and its $10 billion buy/sell swap auction on Monday.

 

India's foreign exchange reserves rose to an over three-month high of $654.27 billion in the week ended Mar. 14. However, MUFG Bank said in a note that "the RBI should at some point come in to build FX reserves, even as it has been more hands-off than we anticipated so far." Following the sharp appreciation in the Indian unit, MUFG Bank has tweaked its forecast for dollar/rupee to 87.50 by end-2025 from 88.50 previously. 

 

While the RBI's passive approach to intervention so far has led to market participants readjusting their outlook for the Indian currency, it has, more importantly, turned them more cautious and prepared for excessive volatility in rupee's exchange rate in the coming times.  End

 

US$1 = INR 85.79

 

Edited by Akul Nishant Akhoury

 

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