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The rupee strengthened significantly against the US dollar on Tuesday, marking its biggest single-day gain since November 11, amid overseas investment flows and a sharp decline in the greenback’s demand from state-owned banks on behalf of oil importers, dealers said.
The domestic currency settled at 81.79 per dollar, against 82.36 per dollar at the close of the previous day’s trade. Tuesday’s level marks the best closing level for the rupee since December 2, Bloomberg data showed. In the past two sessions, the rupee has strengthened by 94 paise.
Traders said that the flows which impacted the currency market on Tuesday could have been related to Adani Enterprises’ Rs 20,000 crore follow-on public offer this month, as well as Carlyle’s purchase of a majority stake in VLCC for $300 million.
They said that lack of significant dollar purchases by the Reserve Bank of India (RBI) at lower dollar/rupee levels amplified the gains for the domestic currency. “The RBI possibly stepped away (from buying dollars) or the RBI was not there as forcefully as it was expected to be — that’s what led to a cut in (dollar) positions. My suspicion also is that given the move between offshore and onshore points, it looks like there were some offshore flows, as well,” Nitin Agarwal, head of trading at ANZ Bank, told Business Standard.
“If the RBI derives comfort from this level and says that it can shore up more reserves here, then it again becomes a soft floor for now. On the other hand, if the market senses that the RBI has built up enough reserves at, say, 82.20 per dollar and might be looking to shore up further reserves only at 81.50 levels, then 81.50 will get tested,” he said.
After falling by around $100 billion from late February to the end of September, the RBI’s foreign exchange reserves have climbed by $30 billion to $562.85 billion at the end of December. The central bank was said to have been replenishing its reserves through dollar purchases in the currency market through November and parts of December.
With the rupee strengthening past successive technical levels, traders who placed bets on the dollar scrambled to unwind their position, pushing up the domestic currency further.
“Actually, what has happened is — all this while the market was being held by dollar demand from oilers (oil importers) but that has now given way.
Once 82.10/$1 broke a lot of the stops (stop-losses) got hit. That’s what we saw today,” said Anindya Banerjee, VP-currency derivatives & interest rate derivatives at Kotak Securities.
“Last time it was below 82 versus the dollar was in early December. A lot of people built long positions (on the dollar) and exporters were not hedged because the premia were low. So, I think that would have gotten triggered once this 82/$ level was breached. Now, it’s trying to play catch-up with other currencies because there’s a huge gap between where the rupee is and where its peers are,” he said.
In stark contrast to the previous month, which saw the rupee underperform most emerging market currencies, the domestic currency fared better than all its peers on Tuesday, traders said.
According to Banerjee, unless the RBI stepped in meaningfully through dollar purchases, the rupee could strengthen to the 81 per dollar mark over the near term.
The improved view on the domestic currency also stems from the increasing conviction of a slower pace of US rate hikes, given recent data sets showing a slower pace of growth in certain key economic indicators. US Fed fund futures currently show around a 25 per cent chance of a 50 basis point rate hike in February, lower than 50 per cent a month ago.
Higher US interest rates lead to a stronger dollar, exerting pressure on emerging market currencies like the rupee. The Fed raised interest rates by a massive 425 bps in 2022 to tame high inflation in the US.
A slower pace of Fed rate hikes could take the global sheen of the US dollar, bolstering currencies like the rupee.
“The near-term view remains bearish for the pair (bearish for the dollar) and a level below 81.70 will pave way for 81.45 while on the higher side 82.10 acts as resistance,” said Dilip Parmar, research analyst at HDFC Securities.
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