MUMBAI: Intervention by the Reserve Bank of India (RBI) in the foreign exchange market stopped the rupee from touching 88/dollar-level mark on Monday as the Indian currency depreciated sharply in the early trade after US president Donald Trump announced to introduce 25 per cent tariff on all steel and aluminium imports into his country, on top of existing metals duties, and threatened to impose reciprocal tariff, sparking trade war fears.
The rupee depreciated to a new low of 87.95 prompting the central bank to intervene, dealers said. They said RBI intervened twice, one at 87.95 levels and then again at 87.60 levels. The quantum of intervention was around $2 to $3 billion.
“The RBI might have sold $2.5 billion-$3 billion. Rupee will gain around 20 paisa more, where RBI will buy dollars. There is two-way intervention,” said a dealer at a state- owned bank.
Dollar selling helped the local currency recover most of the losses to settle at 87.48 per dollar on Monday, against the previous close of 87.43 per dollar.
“The Indian rupee plummeted driven by US trade tariffs and global economic uncertainty. Persistent foreign portfolio outflows added to the rupee’s weakness, though likely intervention by the RBI through state-run banks helped curb excessive depreciation, preventing a sharp gap-up move like earlier phases,” said Abhishek Goenka, chief executive officer, IFA Global.
Experts also said RBI is countering the narrative of further depreciation following a reduction in the policy repo rate. The central bank has cut the policy repo rate by 25 bps on Friday — first in five years — in line with market expectation. The foreign exchange market expected the rupee to depreciate following the rate cut.
In the current financial year, the rupee has depreciated by 4.65 per cent against the dollar, whereas in the current calendar year, it has witnessed 2.13 per cent depreciation.
The dollar index was trading at 108.20 on Monday, against 107.69 on Friday. It measures the strength of the greenback against a basket of six major currencies.
The rupee was the second worst performing Asian currency after the Japanese Yen in the current calendar year. The Japanese Yen depreciated by 3.14 in the same period.
On the other hand, the Real Effective Exchange Rate (REER) of the rupee is expected to have declined to 105, against the peak of 108.14 in November 2024, said experts. It began moderating towards the end of the year, falling to 107.20 in December 2024, according to the RBI’s monthly bulletin.
REER, which represents the inflation-adjusted, trade-weighted average value of a currency against its trading partners, is often used as an indicator of external competitiveness.
“Taking the inflation into account, the REER could have been around 105 in February,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank.
“Our estimate is that the inflation could be 4.5 per cent in January,” she added.
The rupee depreciated by 3.2 per cent against the US dollar since November 6, 2024, the day the presidential election results were announced in the US, largely mirroring the 2.4 per cent appreciation in the dollar index during the same period.
The rupee had breached the key 87 per dollar mark on February 4 as the dollar strengthened after US President Trump slapped tariffs on Canada, Mexico and China. The Indian unit fell to 87 per dollar from 86 per dollar in 15 trading sessions. The movement to 86 per dollar from 85 per dollar took 16 trading sessions. The rupee depreciated from 84 to 85 against the greenback in 46 working days, while 83 to 84 took 478 days.
“The rupee was seen opening lower as it was trading at 87.85-87.90 in the NDF,” said the treasury head at a private bank. “The FIIs are pulling out, also, importers are booking some profit. There could be some dollar crunch which is leading to so much volatility,” he added.
Source: Business Standard
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