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Informist, Tuesday, Feb. 11, 2025

 

By Siddharth Upasani

 

NEW DELHI - Days after Governor Sanjay Malhotra said "day-to-day movements" in the exchange rate should not be focussed on so much and "may not be all that important", the Reserve Bank of India has used brute force to pull the rupee up by the scruff of its proverbial neck.

 

On Monday, the central bank stopped the Indian currency from touching the 88-per-dollar mark. So far on Tuesday, it has outdone itself as aggressive dollar sales helped the rupee post its biggest intraday gain in more than two years after it rose more than 80 paise in early trade to as high as 86.64 per dollar. According to market participants, the RBI may have sold as much as $15 billion since Monday in the spot market and another $10 billion in the offshore market, Informist reported earlier in the day.

 

To be sure, the sharp reversal in the fortunes of the rupee does not contradict Malhotra's views on day-to-day exchange rate movements; after all, the movement cuts both ways. However, what is worth noting is the driving factor behind the RBI's massive interventions, with US President Donald Trump announcing a 25% tariff on steel and aluminium imports on Monday. India, in particular, is at a higher risk from Trump's reciprocal tariffs. According to Nomura analysts, India has a 9.5% weighted average effective tariff on US exports compared to 3% the US has on India's exports.

 

For the last couple of years, the RBI's interventions in the foreign exchange market had stifled activity so much so that some banks even moved their dealers to other segments. But currency volatility is not a sign of market failure, which is what the central bank must stop. Under Malhotra's governorship, the rupee has got a new lease of life. And while there may be some heartburn every now and then, it is never a bad sign when economic variables reflect reality.

 

If the RBI under Shaktikanta Das increasingly tried to stifle all volatility and did away with the need for hedging exposures, Malhotra's first few weeks seemed to give speculators opportunities galore. The massive intervention this week, then, will keep markets guessing; the new central bank chief is not going to let the rupee slide unchecked and let speculators feast. But beyond the daily tribulations, there is little doubt the rupee will continue to be under pressure, such as the circumstances.

 

"While RBI's intervention managed to cap the break out above 88 levels for now, we expect near term volatility and rupee depreciation to continue," Kotak Mahindra Bank's analysts said Monday. "We note that the accentuated moves in dollar-rupee witnessed lately has brought the currency to near fair value. However, given the unrelenting global uncertainties in the near term, we expect the pressure on rupee to continue," they added.

 

In December, the rupee's real effective exchange rate was 107.20 when measured on a trade-weight basis against a basket of 40 currencies. Since the end of 2024, the rupee has depreciated by as much as 2.7% against the greenback before the pullback this week. And when the RBI publishes the real effective exchange rate indices for January and February in the next couple of months, one can be certain they will be closer to 'fair value' than before.  End

 

US$1 = INR 86.77

 

Edited by Vandana Hingorani

 

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