Indian rupee falls past 95/USD as oil climbs, RBI taps swaps to drain excess cash

MUMBAI: The Indian rupee fell past the key 95-per-dollar mark on Wednesday, as escalating conflict in the Middle East put oil prices back on the boil, prompting likely central bank intervention to limit the South Asian currency’s losses.

In addition to spot dollar sales, the central bank also likely conducted FX swaps maturing in September and October to drain excess rupee liquidity from the banking system.

The interventions helped the rupee close at 95.1050, avoiding steeper losses even as Brent oil prices climbed past $100 per barrel on worries over escalating conflict in the Middle East.

Iran’s Revolutionary Guards said on Wednesday they attacked two U.S. vessels and eight oil tankers in the Gulf in response to a U.S. attack on Iranian oil tankers on Tuesday.

Worries about the conflict also weighed on stocks in Mumbai, which fell about 0.9%, in tandem with declines across most regional equities. European shares were in the red as well while futures pointed to a muted start for Wall Street equities.

Meanwhile, dollar-rupee forward premiums jumped with traders pointing to likely sell/buy swaps conducted by the central bank for near-tenor maturities.

The swaps were likely intended to drain excess rupee liquidity stemming from overseas deposits raised by lenders and swapped with the RBI for rupees.

A mix of a phased increase in the incremental cash reserve ratio, moderate sell-buy FX swaps that remain within the market’s absorption capacity, and a limited programme of open market bond sales focused on short-term maturities could be used to manage the liquidity overhang, ANZ said in a note.

“Sell-buy swaps could lift forward premia, potentially supporting the INR by improving hedging incentives (for exporters),” the note added.

On Wednesday, the 1-year dollar-rupee forward implied yield climbed 11 basis points to a more than 3-month high of 3.16%.