Rupee crosses 80/USD again, RBI likely to come to the rescue

• The US Dollar Index (DXY) is at its highest level in more than 20 years, putting pressure on all other currencies, including the rupee.
• A volatile currency makes it challenging for FPIs to transport trade flows in emerging markets, says Anindya Banerjee of Kotak Effects.
• Mecklaic predicts that RBI willing to spend another $20-$50 billion to defend the rupee.
• A recent report by Standard and Poor also states that India has built up buffers to cope with cyclical problems.

The rupee fell below 80 against the US dollar again – a month and a half after hitting this record low. Even as the euro and pound depreciated on Friday, rupee rates expiring on September 28 appreciated amid weakness in crude oil prices. The rupee was supported by foreign fund inflows, currency analysts at ICICI Direct said.

The local currency, which has been volatile all week, fell to 80.11 against the dollar even as it was well below this level at 79.87 during the last trading session. But the hawkish commentary from the US Fed has changed course again.

A Mecklai Financial research report says the US Fed is focusing on taming inflation by continuing to raise interest rates and keep them there for as long as necessary, even if that means the economy slips into recession.

“The moves have naturally pushed the US Dollar Index (DXY) to its highest level in more than 20 years, increasing pressure on all other currencies, including the rupee,” the Mecklai report said.

FPI inflows, which just turned green in July after record outflows in the past seven months, will now also come under pressure from the volatile rupee.

“USDINR has a strong wicket, with such a positive USD background. A strong US Dollar Index, high US bond yields with a strongly inverted yield curve and weak equity markets all make it challenging for FPI and driving trade flows in emerging markets,” says Anindya Banerjee, VP – Currency Derivatives and Interest Rate Derivatives at Kotak Securities.

Indian equity markets also saw the full impact of the decline brought about by the Fed Chair comments on markets around the world. Crude oil prices have also begun to rise to trade around $100 a barrel.

Source: Mecklai Financial

RBI seems unbowed in the ‘battle for 80’

The speed of the Rupee move will be closely regulated by RBI, Banerjee says, and Mecklai also agrees that RBI will join the battle for 80.

The central bank has intervened to keep the rupee against the dollar by spending about $70 billion this year. Nearly $50 billion of this was released for net spot sales, “but RBI seems inflexible” according to Mecklai.

The report predicts that RBI will be willing to spend another $20 or even $50 billion to protect the level they are not specifically targeting. However, it advises investors not to make new bets on the rupee.

Banerjee also says that RBI has two goals: not to let the rupee become a weak outlier, and also not to want the USDINR to become too volatile.

This means they can continue to sell USD as the spot and forwards move to a new all-time high. However, this should not change the pair’s orbit and the path of least resistance would remain upwards. We expect a range of 79.70 and 80.50 in the next one to two weeks,” he says.

The ‘buffer’ that India has


A recent Standard and Poors report also said India is well positioned to combat the cyclical difficulties caused by the dollar’s dominance and high commodity prices due to the buffers built up.

“The key differentiator for India remains that the country is facing these challenges, these tensions from a relatively strong position,” said Andrew Wood, director of sovereign and international public finances rating.

Despite RBI releasing much of its dollar into the spot market, its foreign exchange reserves totaled $570 billion as of August 12.

Wood also said he expects reserves to moderately recover to about $600 billion by the end of this year, and remain relatively flat for years to come.

In September 2021, Indian forex reserves totaled $642 billion.

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