The rupee soared past its emerging market peers after being bolstered by a weakened US dollar and a surge in foreign stock inflows. The Indian rupee was trading at 68.46 against the American greenback on Monday, having closed at 69.10 on Friday. The pairing marks the strongest level for the Indian rupee since August 2018. It comes after the US dollar found itself soften after reports suggested the Federal Reserve will cut rates later this year.
Market participants expect the central bank to keep its benchmark overnight interest rate unchanged and stick to its pledge of a “patient” approach to monetary policy when it meets this week.
Paresh Nayar, head of trading desk at First Rand Bank in Mumbai, said: “We have seen large (dollar) inflows in the last few days hitting the market.
“USDINR swap window followed by lower trade deficit added to INR strength.”
Meanwhile, rupee investors are reacting positively to a recent surge in popularity of Prime Minister Narendra Modi’s ruling Bharatiya Janata Party (BJP) party.
Foreign inflows into Indian equities and debt markets have surged, with $3.65 billion pouring in this month as of March 15.
That compares with inflows of $1.58 billion in February and $788 million outflows in January, according to exchange data.
A forex dealer at a state-run bank: “Typically, the rupee rises in March due to seasonal factors.
“But this time the Modi factor is also getting quite a bit of inflows.
“The RBI (Reserve Bank of India) also seems to be waiting for the rupee to touch a specific level rather than come in intermittently and intervene.
“I expect RBI to intervene if the rupee rises to 69.50.”
In a bid to mop up dollars and pump in rupees, the central bank last Wednesday said it would conduct its first dollar/rupee buy-sell swap auction on March 26.
The RBI plans to swap rupees for dollars for a total of $5 billion with domestic banks which is likely to help achieve its twin objectives of pushing interest rates down while also preventing a sharp appreciation in the rupee.
At its lowest point last year, the INR had lost around 14 percent of its value against the US dollar.
According to Refinitiv data, since 2016 three out of four times barring 2018, the rupee has moved within a 3 percent range in the month of March.
However, the rally might be short-lived once elections start, according to another forex dealer.
They told Reuters: “Once elections start, the inflows might slow down to some extent, but if Modi returns to power with a strong coalition, then the rupee will rise further which will then force the RBI to step up its intervention.”