Best Asian Currency Raises Questions on RBI's Rupee Policy

Updated on
  • Lack of strong intervention has been surprising: FirstRand
  • TD’s Maggio says RBI focused on achieving inflation target

The rupee’s recent surge, uninterrupted by any strong central-bank intervention, has left traders and strategists asking one question: Has the Reserve Bank of India changed its stance on currency management?

India’s currency capped a seventh weekly gain Friday, the longest run since October 2010, with its 4.3 percent rally over the period being Asia’s best performance. While the RBI has been accumulating dollars all this while, its actions seem to be guided by a desire to boost foreign-exchange reserves and not really to stem the currency’s appreciation, according to TD Securities.

“The lack of strong intervention has been surprising as we saw many of the crucial levels being tested and broken’’ in this rally, said Paresh Nayar, Mumbai-based head of currency and money markets at the local unit of South African lender FirstRand Ltd. “The change in stance is quite evident.”

The rupee reached a 20-month high on Friday, piggybacking on accelerated purchases of Indian assets by overseas funds following a thumping victory for Prime Minister Narendra Modi’s party in key state elections last month. Net inflow into local bonds and stocks exceeded $12 billion last quarter. The buying has continued in April.

A lack of intervention over the next few days could mark the start of a “new dawn for the RBI’s currency policy,” according to Viraj Patel, a London-based foreign-exchange strategist at ING Groep NV. “Any massive reversal in rupee gains looks unlikely, especially as the RBI has a really low tolerance for any inflationary impulses.”

To read more about inflows and the rupee’s surge last quarter, click here.

The central bank has said from time to time that it intervenes in the currency markets only to curb excessive swings and doesn’t target a specific rupee level. Alpana Killawala, a spokeswoman for the RBI, didn’t immediately respond to an email seeking comments.

The rupee’s strength has come at a time when policy makers are seen becoming increasingly hawkish in the face of quickening inflation. A stronger currency helps cut the cost of imports, benefiting Asia’s third-biggest economy, which relies on overseas purchases to meet about three quarters of its oil needs.

The RBI surprised markets by raising the reverse repurchase rate last week, after unexpectedly signaling an end to its monetary easing cycle in February. The inflation outlook for the current fiscal year looks challenging, it said in its April 6 policy statement.

India’s foreign-exchange reserves rose by $2 billion in the week through March 31 to $370 billion, RBI data show. The stockpile has risen for six straight weeks, the longest stretch since July 2014, and is approaching a record $372 billion reached in September.

While the rupee’s rapid advance has seen currency forecasters scrambling to raise their estimates, most still expect it to weaken by the end of 2017 as interest-rate increases by the Federal Reserve spur flows back to the U.S. dollar. The year-end median rupee estimate in a Bloomberg survey is 67.50 per dollar.

The currency reversed early losses and was up 0.1 percent at 64.4950 in Mumbai on Tuesday. Its 6 percent rally over three months is the best in Asia.

“The RBI is now focused on achieving the inflation target,” said Cristian Maggio, the head of emerging-market research at TD Securities in London. The central bank is “buying dollars when possible, perhaps smoothing volatility, but also accepting that the market will determine how weak/strong the rupee should be,” he said.

— With assistance by Candice Zachariahs

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