Rupee Falls Against Dollar Amid RBI Currency Controls

On Friday, the Indian rupee lost a little bit of ground against the US dollar. The currency ended the week practically flat thanks to the Reserve Bank of India’s (RBI) expected intervention, and forward premiums reached their highest level in a month as a result.

The rupee fell from 82.7625 to 82.8575 per dollar during the previous session. The rupee was at 82.87 last Friday.

This week, a gain of around 20 basis points brought the USD/INR 1-year implied yield to 2.20%. The 1-year forward premium increased by 17 paisa from the previous week to 1.82 rupees. According to dealers, the Reserve Bank of India is likely to blame for the rupee’s constrained range and the increase in premiums.

RBI Sell/Buy Swaps to Prop Rupee

The RBI was suspected of executing sell/buy swaps in the futures market through public sector banks and of selling dollars to maintain the rupee above 83 to the dollar.

The RBI often engages in buy/sell swaps and spot dollar sales, but it appears that its current focus is on preventing further currency depreciation and maintaining high premiums, according to a trader at a Mumbai-based bank.

Because central banks around the world have hawkish outlooks, the rising risk aversion internationally has not affected the currency. This week, the Bank of Japan suddenly raised the ceiling on the yield on 10-year bonds.

While India’s BSE Sensex is down 2.4% this week, its worst performance in six months, US stocks are expected to fall for a third straight week. Jayaram Krishnamurthy, head of research and advisory at Almus Risk Consulting, said: “The steep correction (in Indian shares) has not led to more weakness in the rupee.” He further stated:

“We expect the rupee to hold to its current range between 82.40 and 83.00, with the boundaries being well protected by the state-run banks’ actions.”