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Rupee recovers, ends stronger vs US dollar as RBI flexes FX reserves muscle amid hawkish

NEW DELHI: The rupee bounced back sharply to settle stronger versus the US dollar on Thursday, as likely market interventions in the form of dollar sales by the Reserve Bank of India instilled confidence in domestic currency traders amid a decisively hawkish policy stance adopted by the Federal Reserve.

Traders also took fresh bets on the rupee as the dollar index weakened from the highs seen previously in the day, dealers said. The index, which is a measure of the US dollar against six major rival currency pairs, fell to 96.26 against a high of 96.45 earlier in the day.

The partially convertible rupee closed at 76.0850 per US dollar as against the previous close of 76.2300/$1. The Indian currency, which had started off the day’s trade at 76.28/$1 travelled in a range of 76.0575-76.3125/$1 in the course of the day.

In the run-up to the US Federal Open Market Committee’s policy statement, the rupee has witnessed a significant bout of volatility, shedding close to 2 per cent over a month; as overseas investors cut down holdings of Indian assets in anticipation of higher interest rates in the world’s largest economy.

With inflation heating up to a near-four-decade high in the US, expectations were strong that the Fed would quicken the unwinding of asset purchases while paving the way for interest rates to be tightened.

At the conclusion of its two-day monetary policy meeting late Wednesday, the Fed did exactly that, announcing an end to pandemic-era asset purchases by March 2022 and signalling that as many three rate hikes of 25 basis points each could be on the cards in the next calendar year.

However, with the rupee already having taken a heavy beating, much of the news had been factored in, dealers said, adding that speculating against the local currency would be a risky proposition given the enormous foreign exchange reserves at the RBI’s disposal. The latest data showed that the RBI’s foreign exchange reserves were at $635.91 billion.

“The RBI has set the limit today; basically this proves that the central bank was waiting to have clarity on exactly what the Fed intends to do before expending reserves,” a dealer with a foreign bank said on condition of anonymity.

“Yes, there are factors such as widening trade deficit, elevated oil prices, and FPI selling which are headwinds for the rupee but on the other side RBI has amongst the largest FX reserves in the world; the sharp pullback from 76.26-76.28/$1 levels was because RBI showed its strength. Apart from that we also expect more foreign money chasing IPOs, so depreciation should be gradual,” he said.

Government bonds weakened marginally as traders offloaded some stock to make room in their portfolios for a fresh supply of sovereign paper worth Rs 24,000 crore through a primary auction on Friday.

The yield on the 10-year benchmark 6.10 per cent 2031 paper rose one basis point to settle at 6.37 per cent. Bond prices fall when yields rise and vice-versa.

While the hope of prolonged monetary policy accommodation in the face of the fresh growth shock posed by the Omicron strain of the coronavirus supported bonds, traders were wary of piling on exposure as the Union Budget drew near, dealers said.

“Unless there is an announcement on the global bond index inclusion, yield on the 10-year paper will remain around 6.30-6.40 per cent,” a dealer with a private bank said.

“Gross borrowing is likely to be in the Rs 11-12 lakh crore zone again the next year and banks are sitting on excess SLR (Statutory Liquidity ratio), so demand-supply will remain a challenge,” he said.

Read More : Rupee recovers, ends stronger vs US dollar as RBI flexes FX reserves muscle amid hawkish

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