RBI Likely Sold Dollars to Nip the Threat of Rupee Slipping Below 83 Mark on Tuesday

The rupee has been under pressure from a ballooning oil import bill, high inflation and the Federal Reserve's aggressive interest rate rises that have elevated yields on the US dollar.

New Delhi: The Reserve Bank of India’s intervention likely prevented the rupee from falling below the 83-per-US dollar level on Tuesday, January 3, traders told Reuters.

The rupee closed at 82.8800 per US dollar, down from 82.7375 in the previous session.

The local currency on the interbank order matching system fell to 82.9950, prompting state-run banks to sell dollars, likely on behalf of the RBI, three traders, who didn’t want to be identified, told Reuters. Such intervention is used to shield the rupee from excessive volatility.

The rupee has been under pressure from a ballooning oil import bill, high domestic inflation and the Federal Reserve’s aggressive interest rate rises that have elevated yields on the US dollar.

According to Business Today, a past RBI study has shown that a 5% depreciation in the rupee could push inflation higher by roughly 20 basis points and vice versa. Added to that, a depreciating rupee can dampen foreign institutional investor (FII) sentiment and lead to FII outflows.

In fact, FIIs have been net sellers to the tune of $16 billion so far this year, the Financial Express reported, citing data from the National Securities Depository Limited. This is the first time in four years that FII flows have turned negative.

Quartz reported that this rout was worse than the one during the 2008 global financial crisis, when FIIs pulled out roughly $12 billion from Indian stocks.

This is how a rapidly depreciating rupee leads to the import of inflationary pressures from abroad and worsens the domestic inflation fight.

Also read: Four Reasons Why 2023 Is Starting on a Grim Note for India’s Economy

The central bank sells off a part of its US dollar reserves and asks for rupees in lieu. Business Today explains this mechanism with the help of an example.

For instance, the RBI offers to sell $100 million at the cost of Rs 80 per dollar. And then seeing the interest of the currency market, it announces that it will sell off $200 million more, hence, the buyers get an opportunity to buy more US dollars at a time when demand for it is very high.

However, by doing so, the rupee in the currency market gets reduced by Rs 8,000 million, so there is less rupee left in the market. And lower supply of the rupee causes the value of the rupee to rise or it gets costlier.

“(The) RBI is not allowing it (USD/INR) to move higher, and therefore, it is unable to cross 83 for the present,” Anil Bhansali, head of treasury at Finrex Treasury Advisors, told Reuters.

The 83.05-level should be a stop-loss for unhedged positions of importers, he added.

According to the news agency, the rupee, which was anyway under pressure on account of importer hedging, was further hurt by the dollar’s surge against its major peers. The dollar index rose almost 1%.

An importer buys currency futures to hedge against the risk of a depreciating rupee. When the rupee depreciates, the dollar will appreciate, and therefore, the value of the USD-INR futures will go up. Any loss on the importer’s dollar payable due to a weaker rupee will be compensated by the long futures on the USD-INR.

The Indian rupee ended 2022 as one of the worst-performing Asian currencies with a fall of 10.14%, its biggest annual decline since 2013.

The rupee finished the year at 82.72 to the US currency, down from 74.33 at the end of 2021, while the dollar index was headed for its biggest yearly gain since 2015.

The dollar index will be eyeing the slew of key US economic data as it seeks to recover from the near 8% decline in the last quarter, the Reuters report said.