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Indian rupee: What’s behind rupee’s stellar rally against dollar? No, it’s not RBI

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MUMBAI: The rupee strengthened Monday to levels last seen before India enforced one of the world’s most comprehensive lockdowns early summer, but the central bank surprisingly didn’t step in to prevent the local unit’s climb on a day that reportedly saw lumpy dollar inflows.

The rupee gained 0.70% to close at 74.32/$, its strongest level since March 18. The US-based Brookfield is said to have brought in about half a billion dollars, creating instant demand for the rupee, three currency traders told ET.

Brookfield did not immediately reply to ET’s queries.

The global asset manager with $550 billion in investments has already committed to certain high-value projects in India. The inflows were said to be a part of that portfolio.

“The rupee turned volatile, breaking its relative stability,” said Bhaskar Panda, executive vice president at HDFC Bank. “Inbound investment flows helped the rupee gain, with currency traders not spotting any attempt to check the sharp rise. If equity/investment flows continue, the rupee is likely to rise further.”

Foreign portfolio investors net purchased more than Rs 46,000 crore this month, the highest since March last year. Since the beginning of August, the Rupee Options Volatility, a barometer of calmness, dropped 60 basis points to 3.84%, showed data from the Financial Benchmark Pvt Ltd.

“In the past two-three months the central bank has been intervening in the market, shoring up dollar reserves,” said Anindya Banerjee, currency analyst at Kotak Securities. After a long time, it sprang a surprise, and was conspicuous by its absence. It seems the central bank is equally mindful of the rupee liquidity in the market, especially at a time it may have to intervene to stop the rising yields.”

The benchmark government bond yield rose to 6.17% Monday, with investors incurring mark-to-market losses. When bond yields rise, prices fall. This month, the rate gauge jumped 40 basis points after the central bank’s policy minutes hinted at diminishing prospects of a rate cut later this year.

The central bank is expected to purchase bonds from the open market, a move that will infuse cash into the system. A spot dollar buying too will increase rupees in the system. Both are inflationary measures that have the potential to change the rate trajectory.

“Traders waited for the central bank to intervene in the market, cutting a sharp rise in the rupee’s value, ” said K N Dey, United Financial, a Mumbai-based forex firm. “Many participants expecting the central bank to intervene suffered losses as the rupee gained significantly.”

The central bank did not intervene both in the inter-bank and the futures markets, dealers said.

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