Rupee Stages Sharp Rebound as RBI Intervention Turns Sentiment

The Indian rupee staged a sharp recovery over the last two trading sessions after plunging to a record low earlier this week, aided by aggressive intervention by the Reserve Bank of India, easing crude oil prices and growing expectations of additional measures to stabilise the currency.

Importantly, the RBI appeared to get substantial bang for the buck from its intervention. Once global sentiment improved marginally because of softer crude oil prices and easing US bond yields, the central bank’s dollar sales helped pull the rupee above 96/$1.

The rupee closed at 95.69 per dollar on Friday, recovering sharply from the all-time low of 96.96 touched on Wednesday. The nearly 1.3% rebound over two sessions marked one of the strongest short-term recoveries for the currency in recent years after relentless depreciation pressure driven by foreign fund outflows, elevated crude oil prices and global risk aversion.

Despite the rebound, the rupee has still weakened by around 5% since tensions in West Asia escalated in February, making it one of the worst-performing Asian currencies during the period.

Here are the key factors behind the rupee’s sharp rebound:

• Aggressive RBI intervention curbed panic dollar demand
  

The RBI sharply intensified intervention in the foreign exchange market after the rupee touched successive record lows earlier this week.

Reuters reported that the central bank sold over $2 billion on Thursday alone and continued dollar sales on Friday. The intervention helped absorb panic dollar demand and prevented speculative positions from building further against the rupee.

More importantly, the intervention signalled that authorities were uncomfortable with the pace of depreciation as the rupee approached the 97-per-dollar mark, helping stabilise market sentiment and forcing a reversal in bearish rupee bets.

• Government signals additional measures to support rupee

Support for the currency also came from indications that the government and RBI were evaluating broader measures to contain volatility in the foreign exchange market.

Commerce Minister Piyush Goyal on Thursday said India was considering several steps to counter rupee depreciation after the currency touched repeated record lows in recent weeks.

The remarks reinforced expectations that policymakers could deploy additional administrative and liquidity-support measures if volatility persists.

• Softer crude oil prices reduced external pressure

A sharp correction in crude oil prices provided temporary relief to the rupee after concerns over West Asia tensions had earlier triggered fears of imported inflation and widening current account pressures.

Brent crude oil prices fell more than 5% to near $105 per barrel amid hopes of progress in US-Iran negotiations, easing fears of prolonged supply disruptions.

Softer crude prices also reduced dollar demand from oil marketing companies, which often intensifies pressure on the rupee during periods of global energy shocks. Besides, Bank of Indonesia’s interest rate hike of 50 basis points also helped curb some of the excessive short positions in emerging market currencies in offshore markets.

• Decline in US bond yields improved risk appetite

Global financial conditions also turned marginally supportive for emerging market currencies.

The US 10-year Treasury yield slipped below 4.60%, helping improve broader risk sentiment across financial markets. Lower US bond yields typically reduce pressure on emerging market assets by narrowing interest rate differentials and moderating safe-haven demand for the dollar.

The pullback in Treasury yields coincided with improving sentiment around a possible diplomatic breakthrough between the US and Iran, which also supported risk-sensitive currencies globally.

• RBI’s $5-billion swap auction supported confidence

The RBI on Wednesday announced a $5-billion dollar/rupee buy-sell swap auction aimed at injecting durable rupee liquidity into the banking system while simultaneously augmenting foreign exchange reserves.

The announcement reassured markets that the central bank remained willing to deploy balance sheet tools to stabilise currency conditions amid persistent volatility.

India’s foreign exchange reserves stood at $688.89 billion as of May 15.

• Prospects of NRI inflow measures boosted sentiment

Media reports indicating that the RBI was considering additional measures to attract foreign currency inflows from non-resident Indians also supported the rupee.

The measures could reportedly include special foreign currency deposit schemes and additional swap facilities, with officials estimating potential inflows of up to $50 billion.

The possibility of fresh foreign currency inflows helped strengthen confidence that authorities retain sufficient resources to manage external sector pressures and contain excessive volatility in the rupee.

Even so, traders said the sustainability of the rebound would depend heavily on the trajectory of crude oil prices, geopolitical developments in West Asia and the persistence of foreign portfolio outflows in the coming weeks.