Mahatma Gandhi is depicted on 100 Rupee notes in an arranged photograph in Mumbai, India, (Photographer: Scott Eells/Bloomberg News)

Rupee Strengthens For Second Straight Day

A weakening dollar, unwinding of positions in the offshore market and continued speculation of stronger measures to protect the rupee, helped the Indian unit recover for a second consecutive trading day.

The rupee closed at 72.20 per dollar in trade today.

Rupee Strengthens For Second Straight Day

The Indian currency gained 53 paise to trade at more than a two-week high of 71.85 per dollar compared with Wednesday’s close of 72.37. The local unit recovered almost 1.5 percent in the last two sessions, having hit an all-time low of 72.98 earlier this week. Markets were closed for a local holiday on Thursday.

Rupee Strengthens For Second Straight Day

The rupee started recovering on late Wednesday afternoon following reports that the Reserve Bank of India is in talks for a forex-swap or an oil window for oil marketing companies in India, said B Prasanna, group executive and head-global markets group, ICICI Bank. The strength, in turn, led to unwinding of long dollar positions and also prompted exporters to sell dollars. While the RBI did step in, the intervention was not so much, said Prasanna.

The gains in the Indian rupee extended on Friday, helped by a weaker dollar. The dollar weakened for the third day to trade near its lowest level in a little over two months. Still, the rupee outperformed other Asian currencies, strengthening as much as 0.7 percent against the dollar.

The rupee has seen a dramatic recovery as the market has realised that the government will be vigilant on currency management and additional policy measures could be on the anvil, Madhavi Arora, economist - forex and rates at Edelweiss Securities Ltd. The improvement in global risk appetite across asset classes also helped Asian currencies and the rupee, she said, adding that some cool-off in Brent crude prices has also supported the domestic currency.

Arora said markets await development in the U.S.-China trade spat, the weekend OPEC meeting and new measures from Indian policymakers to take further cues.

So far this year, the rupee is the worst performer among Asian peers, having weakened more than 11 percent. The Indian currency started weakening amid worries that rising fuel prices would widen the current account deficit and lead to foreign outflows. The weakness became pronounced after the market started to believe that the government and the RBI are in favor of allowing the currency to depreciate.

However, policymakers have now stepped in. One set of measures have been announced and another set is on the anvil.

On September 14, the government announced measures to attract capital flows including removing concentration caps placed on foreign portfolio holdings in individual debt securities. Government officials have also indicated that higher import tariffs are under considerable to balance the trade account.

Should the weakness in the rupee continue despite those two measures, other options such as a special window to provide dollars to oil companies and schemes to attract NRI funds can be considered.

“With oil accounting for around a quarter of India's total imports, the oil marketing companies are one of the largest buyers of forex in the India Rupee (INR) market. With persistent one-way flow (sell INR, buy USD) and often buying in clusters, the OMCs can add FX volatility to INR during a time when global risk sentiment and foreign inflows are fragile,” said Morgan Stanley in a note.

The research house added that it sees the possibility of the RBI announcing a scheme to draw in NRI dollars, similar to what it did in 2013.

We remain bearish on INR in the near-term but will turn bullish once we receive concrete signals from the RBI that it will implement the FCNR (B) FX swap facility again.
Morgan Stanley