India RBI's heavy FX footprint revives memories of a tightly managed Indian rupee

MUMBAI: Persistent central bank intervention that has absorbed recent pressure on the rupee and subdued moves in the currency is reminiscent of a period when the Reserve Bank of India firmly anchored its trading range, bankers say.

Despite volatile crude oil prices due to war in the Middle East and persistent dollar demand from hedging flows, the rupee has demonstrated remarkably muted price action since last week.

State-run banks consistently offered dollars whenever the currency came under pressure, six bankers said, speaking on condition of anonymity because they are not authorized to speak to the media.

The dollar sales occurred at multiple price levels, combining brief spurts of aggressive dollar selling with large offers, seemingly aimed at anchoring the rupee above certain levels, a banker at a state-run lender said.

That’s helped establish a narrow 30 paisa range last week, including periods where the rupee barely budged for several hours despite turbulent oil prices and elevated dollar demand.

For India, the world’s third-largest importer of the commodity, higher crude oil prices are a key economic risk.

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The Reserve Bank of India did not respond to an email seeking comment.

On Monday, the rupee slipped to 95.4775 per dollar in early trade, moving in roughly a 10-paisa range. The RBI stepped in to sell dollars, traders said, extending its intervention to every trading session since the previous Monday.

“The RBI has appropriately intervened to cushion the impact of global volatility arising from developments in West Asia and fluctuations in crude oil prices,” said Tanay Dalal, senior vice president for business and economic research at Axis Bank.

“We expect continued nimble management,” he said, adding that the rupee will likely move in a 94.50-96.00 range through the end of September.

The central bank’s market intervention shave revived memories of when Shaktikanta Das was at the RBI’s helm, when the central bank was widely seen having a heavy-handed presence in the foreign-exchange market. During Das’ tenure, which ran through December 2024, the RBI frequently smoothened the currency’s moves in both directions.

The rupee’s muted price action this week has driven a collapse in 14-day realized volatility to around 2% from more than 4% at the start of August, especially striking at a time when Brent crude oil prices remain elevated near $90 per barrel.

“The macro backdrop called for a much wider range. However, the central bank has effectively put a blanket (over dollar/rupee),” a senior treasury official at a private sector bank said.

“The current market setup feels like a throwback to 2024.”

Forming the backdrop to the central bank’s stepped up FX market presence are chunky dollar inflows drawn by its measures to bolster India’s balance of payments. Those steps have attracted nearly $57 billion, contributing to India’s foreign exchange reserves climbing above $700 billion for the first time since April.