MUMBAI – The rupee strengthened sharply on Tuesday from a near record low against the dollar after the central bank stepped in with what dealers called “massive” intervention, signalling an intent to defend the beleaguered domestic currency.
The Reserve Bank of India is believed to have intervened aggressively this month as the rupee moved steadily towards its all-time low driven by a mixture of worsening global risk aversion and concerns about India’s fiscal and economic challenges.
The interventions have been accompanied by surprise measures such as forcing exporters to convert half of their foreign currencies in their accounts.
Besides, the RBI announced on Monday it would purchase bonds via open market operations at the end of the week, its second weekly OMO, which analysts widely interpret as intended to offset the impact on rupee liquidity from its dollar sales.
“RBI will keep up the intervention though ongoing Greek impasse and broad dollar strength will keep USD/INR biased for gains,” said Radhika Rao, an economist at Forecast Pte in Singapore, adding that the central bank will defend the 54 rupees per dollar level.
“As a backstop to alleviate liquidity strain, OMOs could become more frequent.”
The rupee dropped as low as 54.15 to the dollar soon after the day’s opening trade, not far from a record low of 54.30 to the dollar hit in mid-December. It closed at 53.9750 on Monday.
However, the central bank was soon seen stepping in with dollar sales via state-run banks, s harply pushing down USD/INR, which was last trading at 53.85/8650 after hitting as low as 53.50.
“It seems like a massive intervention,” a chief dealer with a state-run bank said.
The OMO announcement sent bond yields lower, with the benchmark 2021 bond yield down 4 basis points at 8.48 percent.
Analysts are split about whether the central bank can continue to defend the currency, but in the near term, they say the RBI is looking to keep USD/INR below 54.
