Indian rupee extends rally, putting RBI's dollar-buying threshold in focus

MUMBAI: The Indian rupee extended its rally on Monday, hitting a six-month high and putting potential dollar purchases by ​the Reserve Bank of India in focus, with traders weighing the ‌central bank’s need to replenish forex reserves and manage sizeable short-dollar forward positions.

The Indian rupee touched an intraday high of 93.70 per dollar, extending last week’s rally of ​more than 1%. The currency has appreciated nearly 3.25% in about ​a month after approaching an all-time low.

Emkay Global’s Madhavi Arora ⁠expects the RBI to use any sustained improvement in dollar inflows to ​rebuild its foreign exchange buffers rather than allow a sharp appreciation in ​the rupee.

The central bank’s sizeable net short forward position and India’s continuing current account funding needs are likely to cap the currency’s upside, she said.

Reasons for the rally

Favourable developments, ​alongside measures by the RBI, have helped sustain the rupee’s recovery. ​A decline in crude oil prices has alleviated pressure on the Indian currency, while foreign ‌investors ⁠have returned to domestic equities.

At the same time, the central bank’s recent measures have helped address the persistent supply-demand imbalance in the foreign exchange market, where dollar demand from importers had been outstripping supply from exporters.

Bankers ​are now asking at ​what level ⁠the RBI will step in to buy dollars and temper the rupee’s appreciation.

There are two reasons why the central ​bank may be keen to absorb some of the ​dollar supply, ⁠they say.

For one, India’s foreign exchange reserves have fallen $68 billion from their peak. The second consideration is the RBI’s sizeable forward exposure.

The RBI’s net short ⁠dollar ​position in the forward market ballooned to a ​all-time high of nearly $240 billion is September, leaving the central bank with substantial future dollar ​commitments to manage.