RBI's 3-day intervention push signals lower tolerance for Indian rupee weakness, bankers say

MUMBAI: The Indian central bank has stepped up defence of the rupee over the last three days by selling dollars aggressively and targeting off-peak trading hours to amplify the impact of market interventions, four bankers said.

The shift comes after the Indian unit hurtled towards its record low of 96.96 per dollar last week as the Middle East tensed up - India imports almost 90% of its oil supplies - at a time when investors and traders were already struggling to gauge how much weakness policymakers would tolerate.

The change in the Reserve Bank of India’s approach is significant because it could help steady market expectations and comes against the backdrop of higher-than-expected inflows spurred by measures unveiled in June to attract foreign currency and support the rupee.

On Friday, the RBI intervened heavily - with two senior bankers estimating the dollar sales to the tune of $8 billion-$9 billion across the spot and non-deliverable forward market.

Indian central bank likely intervenes as Indian rupee nears record low, traders say

The RBI followed up with dollar sales on Monday and Tuesday, which, four bankers said, helped lift the rupee past the 96-per-dollar level in a market that was already drawing support from a 15% pullback in crude oil prices.

The RBI is likely “trying to impress on the market that they are defending the currency staunchly and won’t allow disorderly moves,” said Dhiraj Nim, FX strategist and economist at ANZ.

The RBI did not immediately respond to an email seeking comment on details about its interventions and whether its broader approach towards them has shifted.

Bankers quoted in the story requested anonymity as they are not authorised to speak to the media.

Intent and inflows

Earlier this month, there was little evidence the RBI was actively propelling the rupee higher, as state-run banks supplied dollars at a measured pace, bankers said.

The interventions since Friday, though, have displayed a faster pace of dollar sales alongside a targeting of timings when market liquidity thins, a banker at a state-run lender said.

On Tuesday, for instance, the central bank’s dollar sales came right after the daily fixing window, which attracts concentrated dollar buying and selling. The thinner market activity created room for amplified price action, pulling the rupee to a two-week-high of 95.64.

The RBI’s stepped-up intervention comes against the backdrop of higher-than-expected inflows - about $40 billion since early June - spurred by a series of measures unveiled last month.

Economists say these flows are providing the central bank with additional ammunition to defend the currency.

In a note published on Monday, State Bank of India said inflows linked to FX deposits from non-resident Indians had surpassed the total mobilised in 2013 - when a similar window was opened to deal with the “taper tantrum”.

“Allowing the rupee to depreciate even now against such healthy capital inflows may result in an endless fall driven by self-fulfilling prophecy,” SBI said.