Rupee's Big Gain

Why did the Rupee make headlines yesterday?

India’s rupee just had its biggest one-day gain in almost four months yesterday as it closed just under 88, with traders saying that the RBI stepped in heavily to support the currency. This, alongside hopes of a possible US trade deal, also boosted street sentiment.

What triggered the move?

At the end of last week, the rupee was the worst performer for the year in the Asian FX basket. That, coupled with the fact that the dollar index has actually dropped more than 9% on a year-to-date basis might have shaped the RBI’s thinking that the weakness may have been led by speculators. Therefore, it said that it is ready to intervene until the rupee stabilizes at a stronger level. Another reason could be that with the rupee’s drop, its valuation against most of its peers had begun to look more reasonable.

How did the RBI intervene?

Market chatter says that the RBI intervened by selling dollars in the onshore and the offshore markets.

Does this mean the RBI is tweaking its currency management approach?

Governor Malhotra had expressed a view that he would allow greater flexibility in the movement of the rupee when he replaced Shaktikanta Das as the RBI governor. However, with the current intervention and the one we saw in February, there is some chatter that the framework may be shifting somewhat as global newsflow continues to evolve rapidly.

What about the fundamentals?

They remain mixed. On the positive side, the dollar continues to trade not too far away from its yearly lows, crude oil is showing little signs of a meaningful lift and foreigners are beginning to claw back into domestic stocks. There are negative pockets too, however. Only yesterday, data showed that the nation’s trade deficit widened to $32.15 billion in September, the largest since August last year and sizeably above economists’ estimate of $27.5 billion. It is widely known that larger-than-expected deficits can pressure a currency over time.

What are some of the important levels that the markets are watching?

Downside: 87.60, 86.93

Upside: 88.10, 88.40

Bottom line: The rupee strengthened mainly due to RBI action, a weaker US dollar, cheaper oil, and improved flows. However, the wider trade deficit remains a headwind. In the near term, the range to watch is 86.93 to 88.40.