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Informist, Friday, May 2, 2025

 

By Pratiksha

 

NEW DELHI – The rupee's rise past the psychologically-crucial level of 84-per-dollar on Friday caught foreign exchange market players off guard. While the Indian currency has been appreciating since last month, the Reserve Bank of India was not expected to allow such a jump. The end result is that both punters and hedgers are uncertain whether the new-found strength is here to stay or the inevitable fall is waiting round the corner.

 

Friday, following inflows into domestic equities and a weakening dollar index, the rupee rose to as high as 83.75 a dollar--the strongest it has been in seven months--just four weeks after it had risen past 85.00 per dollar.

 

Since the start of March, the rupee has gained 3.4% against the US dollar after having dropped by 4.4% in Oct-Feb. It closed at 84.58 a dollar on Friday on persistent dollar purchases, likely by importers and, finally, the RBI.

 

"It is tough to bet big on the either directions (of the rupee). One doesn't really know when the RBI will step in or how much they will buy (dollars). So one can't really put a finger on any figure right now. We are taking it one day at a time," said a senior treasury official at a big state-owned bank.

 

The RBI's hands-off approach first became a major source of uncertainty in January after new Governor Sanjay Malhotra seemingly favoured letting market forces determine the rupee's level. However, the central bank's absence on the buying side over the last few weeks has been unusual, as it has foregone the opportunity to rake in a significant amount of dollars to build its foreign exchange reserves. With flows reacting daily to the heightened global uncertainty, the average daily range of the rupee was 37 paise in April, up from 24 paise in March.

 

"RBI at this point in time, unlike in previous episodes where they used to step in very aggressively at a particular level, has been more open to two-way flexibility. That is one of the most important reasons that we saw such big (exchange rate) moves. Usually the bias is towards weakening rather than appreciating. But this time we have seen very good two-way move. Now, in the near term it is very difficult to say where rupee will stop," said Anubhuti Sahay, head of India economic research at Standard Chartered Bank.

 

Market participants are of the view the RBI has allowed the rupee to rise sharply in order to discourage a build-up of speculative bets against it. The old intervention strategy, under which the RBI bought dollars whenever the rupee appreciated, was often criticised for encouraging bets against the Indian currency. However, market participants pointed out that even if they build positions in favour of the Indian currency now, they have no clarity on how much appreciation the RBI may allow.

 

Tensions between India and Pakistan are another source of apprehension among market players. Following the Apr. 22 terror attack in Pahalgam, both nations have taken a raft of measures against each other, with India putting the critical Indus Waters Treaty in abeyance and Pakistan closing its airspace to Indian airlines. According to Sameer Karyatt, executive director and head of trading at DBS Bank India, these geopolitical tensions have added to the uncertainty surrounding the dollar-rupee pair, "making it difficult to take a clear stance on either side."

 

Market participants are also keeping a close eye on the negotiations between India and the US over their proposed bilateral trade agreement. A trade deal between the two would be a big plus for India, which faces the return of 26% reciprocal tariffs in July. While recent comments from both governments suggest an agreement may be successfully negotiated this year, some traders are still in wait-and-watch mode.

 

But while it is increasingly likely that India and US will find a way to make commercial peace, the volatile nature of talks between China and US and their impact on the yuan is a risk that can't be ignored.

 

"Like other Asian currencies, Indian rupee will also get caught between crosswinds of weaker dollar (index) and weaker yuan. While not on a one-on-one basis, but at least in some proportion we will see the yuan weakness being reflected in rupee," Standard Chartered Bank's Sahay said.  End

 

Edited by Vandana Hingorani

 

 

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