Rupee Rises as Indian Central Bank Adds to Intervention Tools

  • RBI says it will intervene in currency derivatives if needed
  • Central bank trying to stave off pressure before Fed: ANZ

The rupee strengthened for the first time in seven days after India’s central bank indicated it may take additional measures to stem the currency’s losses as traders gear up for a U.S. interest-rate increase.

The Reserve Bank said in a statement late Wednesday it will intervene in the exchange-traded derivatives market "if required” as it looks to manage volatility in the rupee, which depreciated more than any other currency in Asia last month. The rupee rose 0.2 percent to 66.72 a dollar in Mumbai, after losing 0.5 percent in the last six days.

“This is a signal to the market that the RBI is prepared to widen the instruments they use for intervention in order to prevent a sharp decline in the currency,” said Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “The RBI has been trying to damp the depreciation pressure caused on the rupee by a stronger dollar on expectations of a Federal Reserve rate hike.”

The rupee has dropped almost 6 percent this year and traded last week at the lowest level since September 2013 as global funds pared holdings of Indian bonds and stocks amid increased odds that the Fed will raise borrowing costs next week for the first time in almost a decade. Investor sentiment has also soured as Prime Minister Narendra Modi struggles to push through reforms in Asia’s second-biggest emerging economy.

ANZ, which forecasts the rupee will end the year at 66.80 versus the greenback, recommends buying the currency against Taiwan’s dollar, Goh said.

Overseas Holdings

Foreign holdings of Indian sovereign and corporate notes have fallen 15.5 billion rupees ($232 million) in December, National Securities Depository Ltd. data show, after declining 46.9 billion rupees last month, the most since May. Stocks have seen withdrawals of $1.6 billion since the end of October. The rupee’s drop to 67 per U.S. dollar on Dec. 4 and a subsequent rebound prompted speculation the central bank intervened by asking state-run lenders to sell the greenback.

“The Reserve Bank of India intervenes in the domestic foreign-exchange market as and when required in order to manage excessive volatility and to maintain orderly conditions,” the monetary authority said in Wednesday’s statement. “It has been decided to intervene in the Exchange Traded Currency Derivatives segment, if required.”

India’s benchmark S&P BSE Sensex index of shares climbed 0.9 percent on Thursday, ending a six-day streak in which it lost 4.3 percent.

Sovereign bonds were little changed, with the yield on notes due May 2025 at 7.78 percent, according to prices from the RBI’s trading system. It has fallen one basis point in December after advancing 15 basis points last month in the biggest jump since June.

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