Rupee Jumps 62 Paise To 95.16 Against US Dollar As RBI Steps Boost Currency For Second Day

The Indian rupee jumped 62 paise against the US dollar in early trade on Tuesday, October 13, extending gains for a second straight session as the Reserve Bank of India's measures to curb dollar demand continued to support the currency.

The rupee opened at 95.16 against the dollar, compared with Monday's close of 95.78. The move came after the currency gained 93 paise in the previous session, its strongest rise since April, as tighter derivative rules, direct dollar supply to state-owned oil companies and intervention through state-run banks eased pressure in the foreign exchange market.

The recovery also received support from overseas markets on Tuesday morning, with the dollar index easing to 102.45 and the US 10-year Treasury yield indicated slightly lower near 5.20%. Brent crude, another major factor for the rupee, eased towards $105 a barrel after settling at $106.65 on Monday.

Anindya Banerjee, Head of Research – Currency, Commodities and Interest Rates at Kotak Neo, said the RBI's latest actions mark a change in its approach towards the currency.

“In our assessment, the RBI has moved from smoothing rupee volatility to a more active defence and the market respected that shift on day one,” Banerjee said.

RBI Measures Help Rupee Extend Recovery

The RBI has moved on several fronts after the rupee came under sustained pressure from higher crude oil prices, foreign portfolio outflows and demand for dollars from importers.

Under the new rules, cancelled rupee derivative contracts cannot be rebooked, while positions without an underlying exposure have been capped at $5 million, compared with $100 million earlier. Hedgers are also required to confirm that the same exposure has not been hedged elsewhere.

The central bank has also made forward dollar purchases more expensive through a 20% reserve requirement on certain current-account hedges above $2 million.

Another important change involves state-owned oil marketing companies, which are among the biggest regular buyers of dollars in the domestic market. Indian Oil, Bharat Petroleum and Hindustan Petroleum can now source their daily dollar requirements directly from the RBI instead of entering the spot market.

Banerjee estimates that the move could remove around $10-12 billion of monthly dollar demand from the spot market.

Dealer accounts also pointed to RBI dollar sales through state-run banks on Monday, while banks pulled back from offering forward hedges to importers. Together, the measures helped the rupee post a sharp recovery on Monday before extending the move at Tuesday's open.

“The rupee could draw further support from this morning’s modest easing in the dollar index, US yields and Brent,” Banerjee said.

The external environment, however, remains difficult. Brent crude continues to trade above $100 a barrel as risks to supplies from the Middle East remain elevated. Foreign portfolio investors have also withdrawn about $4.6 billion from Indian equities in October so far.

Can The Rupee Hold Its Gains Against The Dollar?

After the sharp two-day recovery, the next test for the rupee will be whether it can sustain below 96 against the dollar once the initial impact of the RBI measures fades.

Banerjee expects USD/INR to remain within a broad spot range of 94-97. Immediate support is at 95.40, followed by 95, while resistance has shifted to 96.

“The next test is whether the pair can sustain below 96 once the initial impact of the measures fades,” he said.

Domestic conditions also remain important. India's 10-year government bond yield rose 10 basis points to 7.40%, while the RBI has increased the minimum daily cash reserve ratio maintenance requirement to 99% from the fortnight beginning October 16. The central bank's ₹25,000 crore bond sale on Tuesday could also keep liquidity conditions tight.

September retail inflation at 5.54%, the highest in nearly two years, has added to the pressure on bonds. India's foreign exchange reserves, meanwhile, stood at $734.6 billion, below the record level reached in September.

Global cues will also be important over the next few sessions. The US Federal Reserve's September meeting minutes showed that most policymakers expected another rate increase this year, while Wednesday's US inflation reading is the next major test for interest-rate expectations.

Banerjee said sustaining the rupee's gains will depend not only on the RBI measures but also on the direction of crude oil and US monetary policy.

“Sustaining the gains will also depend on oil and the Fed,” he said.

A firm US inflation reading could strengthen expectations of another Federal Reserve rate increase and support the dollar, putting renewed pressure on the rupee. A softer reading, on the other hand, could give the domestic currency more room to strengthen.

For now, Banerjee sees 95.40 as the first support for USD/INR, followed by 95, while 96 is the immediate resistance after the sharp recovery over the past two sessions.

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