(April 6): The Indian rupee edged up, extending its biggest rally in 12 years after the central bank doubled down on curbing speculation against the local currency.
The rupee closed 0.1% higher at 93.0612 per dollar after rising as much as 0.4% on Monday. The currency gave up some gains on dollar purchases by local importers and oil refiners, according to Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.
The currency rallied 1.8% on Thursday, the most since September 2013. It may gain further toward the 91.50-92 range as banks unwind their dollar positions ahead of the April 10 deadline, according to Amit Pabari, managing director at CR Forex. Local markets were shut for the Good Friday holiday.
The rupee swung sharply in a holiday-shortened week after the Reserve Bank of India unleashed measures to restrict banks in the onshore forward market. It capped net open positions at US$100 million, sparking a rush to unwind trades. The authority later barred banks from offering non-deliverable forwards — the most widely used offshore rupee instrument — and took steps to prevent traders from rolling over speculative wagers.
The rupee had been hitting successive lows despite repeated intervention by the RBI, with pressure intensifying after the Iran war drove up India’s fuel import costs. The unit has tumbled 8.2% over the past year, making it Asia’s worst-performing currency. Efforts to defend the rupee led to a US$40 billion drawdown in the foreign-exchange reserves over the past four weeks.
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The measures come days before the central bank’s rate decision on Wednesday, its first review since the Iran War began. The focus will be Governor Sanjay Malhotra’s view on the rupee as the curbs have left lenders — the biggest component of India’s stock market — dealing with losses and operational headaches.
Some analysts, however, expect the rupee to give up gains if the Iran war is prolonged.
“I expect the INR to weaken to 96, barring further RBI intervention, if the Iran war stretches on, which is likely to keep oil prices elevated for at least a quarter,” said Apoorva Javadekar, chief economist at Muthoot Fincorp Ltd.
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Still, the rupee may not be Asia’s worst-performing currency, given that Thailand, South Korea and Singapore have a higher reliance on energy imports, especially from the Middle East, he said.
The cost of hedging against rupee weakness shot up as importers rushed to lock in stronger rupee levels for their forward dollar purchases. The premium for buying the greenback three months down the line rose by as much as 96 basis points to 5.93%. This extended a 125 basis point rise on Thursday, which was the biggest since 2011.
While the demand for hedging against rupee declines has increased, there has been a drop in forward dollar sales by exporters because of the RBI’s recent restriction on rebooking forward contracts, said Sajal Gupta, head of forex and commodities at Nuvama Institutional Desk.
Meanwhile, bonds rallied after a big selloff last week, tracking swap rates, which fell on a report about a potential ceasefire in the Iran war, according to Alok Singh, head of treasury at CSB Bank Ltd.
The 10-year yield fell 9 basis points to 7.05%, after climbing 19 basis points last week on fears that the RBI could resort to stronger measures, including interest-rate hikes, to support the rupee. India’s one-year overnight indexed swap rate fell 19 basis points to 6.18% on Monday.
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