Indian rupee posts biggest daily gain in 2 months as RBI ramps up currency defence

MUMBAI: The Indian rupee advanced on Friday to post its best session in two months, after the central bank held its policy rate and announced a host of measures to attract dollar inflows over the medium term.

The Indian rupee gained 0.9% to end at 94.9450 per dollar, its biggest gain since April 2. Forward premiums, the cost of hedging FX exposure, plunged to 2.67 rupees, the lowest this financial year, down from 2.85 rupees.

While holding its policy rate steady, the Reserve Bank of India rolled out several initiatives to attract U.S. dollar inflows, aiming to bolster India’s balance of payments position in a period when the war in the Middle East has pushed up oil prices, spurred equity outflows and helped send the rupee to successive record lows.

The steps include a discounted forex swap facility for public sector companies and banks to raise external commercial borrowings, a similar facility to bear the full hedging cost for banks to raise multi-year deposits from non-resident Indians under the Foreign Currency Non-Resident (Bank) scheme, as well as a widening of foreign investor access to certain Indian government bonds.

Of the various measures, the window for raising foreign currency desposits from non-resident Indians and expansion of bonds under the Fully Accessible Route – which are eligible for global indexes – are the most likely “to deliver the largest and fastest inflows,” according to Kunal Sodhani, head of treasury at Shinhan Bank.

“A realistic base-case estimate would be around $25-30 billion, with upside potential if global bond investors increase allocations to India amid relatively attractive real yields,” he added.

In addition to the central bank’s currency-focused measures, New Delhi announced Friday that it will exempt foreign investors from capital gains tax on receipts from interest or sale of government bonds, further boosting market sentiment.

The steps come as a welcome relief for a currency that was facing the heat due to record outflows from Indian equities as well as elevated crude oil prices.

Asian cues were largely negative, amid caution due to worries over a flare-up in Middle East hostilities, with U.S.-Iran talks still in limbo.