Rajan Buying Dollars to Build Reserves Weakens Rupee in April

Updated on
  • India's currency is Asia's worst performer this year
  • Rupee to stay on a gradual depreciation path: RBL Bank

India’s rupee resumed monthly declines in April on speculation dollar purchases by the central bank to build the nation’s foreign-exchange reserves weighed on the currency.

The stockpile grew by $6 billion in the four weeks ended April 22 to an unprecedented $361.6 billion, the latest Reserve Bank of India data show, as the authority bought dollars to take advantage of inflows into local stocks and bonds. Earlier this month, Governor Raghuram Rajan cut the benchmark interest rate and pledged to end a prolonged funding squeeze in the financial system by infusing cash via bond repurchases.

“Market intervention is the key reason as the central bank consistently mopped up dollars from good inflows after the policy” review, said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “It seems they favor a gradual depreciation in the rupee, while adjusting for inflation.”

The currency slipped 0.1 percent in April to 66.33 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It rose 0.3 percent on Friday and was up 0.2 percent for the week. The rupee had strengthened 3.3 percent in March, the most since September 2013, following declines in January and February. It has dropped 0.3 percent in 2016 in Asia’s worst performance.

‘Gradual Depreciation’

“Unless there is an event shock, like a rate increase by the U.S. Federal Reserve, or a crisis in China, the rupee should stay on the path of gradual depreciation,” Lasrado said. RBL Bank expects the rupee to trade in a range of 66.10 to 66.90 in the near term.

The Fed this week skipped a rate increase for the third straight meeting since kicking off the tightening cycle in December. While it signaled it’s in no hurry to raise rates, policy makers left the door open to an increase in June by removing earlier references to global financial risks from their statement.

The yield on sovereign notes due January 2026 fell two basis points this month and this week to 7.44 percent, and was little changed on Friday, according to data from the central bank’s trading system. It slumped 17 basis points in March.

India sold 150 billion rupees ($2.3 billion) of government bonds as planned on Friday, according to a central bank statement.

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