India’s central bank is intensifying efforts to support the rupee, emboldened by a jump in its foreign-exchange reserves to contest the pressure from higher oil prices.
The Reserve Bank of India has decided to shift to a more constant pattern of intervention to support the currency over the past month, thanks to the level of foreign deposit inflows, whereas previously it would largely step in to curb bigger swings, according to a person familiar with the matter. The change in tack comes from the comfort provided by $73 billion of fresh money under RBI’s measures to attract dollars since June, they said, asking not to be identified discussing policy matters.
In one instance, the RBI spent $7 billion in just a day intervening in onshore and offshore markets as the rupee approached a record low. There are signs the strategy has brought more stability, with the currency’s near-term volatility falling close to a 10-month low.
The extra money strengthens the RBI’s hand just as pressure starts to mount again on Asia’s worst-performing currency this quarter. The respite in June is fading as higher crude prices add to the current account deficit while a narrowing interest rates differential with the US pulls capital from India’s markets. The question though is whether the more robust effort will be enough, when more than $700 billion of reserves have failed to convince investors that the rupee is undervalued.
