How RBI's intervention in overseas currency derivatives market will impact rupee

The recent intervention by the Reserve Bank of India (RBI) in the non-deliverable forward (NDF) market is expected to provide some stability to the rupee amid capital flight to safe assets during coronavirus crisis, analysts said. There has been an element of surprise in the RBI's timing of intervention which made the move effective, they added. "Going forward, direct intervention in the overseas NDF market along with intervention in the spot market will help in curbing sharp rupee swings and also to some extent slow down the pace of rupee depreciation amid this virus fuelled rout", Sugandha Sachdeva, VP, Metals, Energy & Currency Research, Religare Broking, told Business Today.In.

The RBI sold $500 million in the NDF market in March to maintain stability of the rupee, the RBI data showed. The NDF markets allow round-the-clock trading in the non-convertible currencies such as rupee. The trading takes place in overseas markets including Singapore, Hong Kong, Dubai, London and New York markets and doesn't fall under the regulatory purview of the RBI.

According to Bloomberg data, the rupee lost over 4 per cent to the US dollar in March as against a 0.5 per cent gain in April. The rupee was the fifth top performing currency in the Asian market last month.

"Central bank's actions in the NDF market are aimed to curtain the unwarranted volatility ahead of the financial year end and reduce the unnecessary spread between onshore and offshore market. RBI's mandate is to curb the volatility in the forex market and it is expected to intervene from time to time to reduce excessive volatility," Devarsh Vakil, Head, Advisory, HDFC Securities, told Business Today.In.

The RBI recently allowed offshore units of Indian banks to participate in the offshore rupee derivative market to curtail volatility in currency markets due to coronavirus pandemic.

Way ahead

The fresh escalation in the US-China tensions is expected to manifest itself in the form of diplomatic or trade tensions in the near future, Abhishek Goenka, Founder & CEO, IFA Global, said. On the downside, 74.50 is a crucial support for the USD/INR pair, Goenka added. "Up side momentum would gather steam on break above 76.50 again. Broad trend remains bullish for the pair," Goenka said, adding that the rupee may trade in the range of 74 to 78 per US dollar.

Commenting on the expected movement for rupee going ahead, Sugandha Sachdeva said, "Sentiments have also taken a beating amid weak PMI manufacturing numbers, underscoring the impact of coronavirus on the economy, where the overall trend in rupee looks skewed on the downside. The IIP numbers ahead are expected to be weak and are going to further worsen the rupee dollar equation. However, reopening of various economies in a phased manner has boosted risk appetite to some extent and is underpinning the rupee, where 77 mark is guarding it from further depreciation." She expects rupee to gyrate in the range of 75.20 -76.60 in coming days.

Largely protected

"The Indian markets are pricing in a weak economic scenario as nationwide lockdown is extended. At the same time, they are protected from severe downside as large amounts of foreign capital will look to invest in India at lower levels," Devarsh Vakil said.

"We have an inflation targeting central bank with higher dollar reserves which we did not have in GFC 2008, thus we don't expect major depreciation in rupee level unless and until Covid-19 pandemic creates a major health crisis in the world. Rupee is expected to trade in the range of Rs 74.5 to Rs 76.5 per dollar in the near term", Sundar Sanmukhani, Head of Fundamental research desk, Choice Broking, said.

Meanwhile, the rupee surged 10 paise to close at 75.63 (provisional) against the US dollar on Tuesday, amid higher domestic equity markets and gains in some Asian currencies. At the interbank foreign exchange, the rupee opened at 75.62 and finally settled at 75.63, registering a rise of 10 paise over its previous close. During the day the domestic unit saw an intra-day high of 75.50 and a low of 75.72 against the US dollar. On Monday, the rupee had settled at 75.73 against the US dollar.

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