RBI perhaps got a sense of the extent to which interbank was looking to position long when a major IPO-related outflow went through. Until then, the RBI was merely supplying dollars to ensure that 88.80 did not break.
Seeing the market’s skewed positioning, the RBI may have decided to whack down USDINR to crush the speculative longs. On a day when there was positive news overnight regarding the India-US trade deal and USDINR gapped down, the RBI came in aggressively and hammered the spot lower.
A major part of the intervention has been in NDF. Despite the 1-rupee move lower, the market, after a few range-bound sessions amid the festive season, again started positioning long. All this despite positive, constructive news flow continuing around the US-India trade deal.
A hawkish Fed may have contributed to the sentiment turning further against the rupee. The rupee is almost back to all-time lows again (down 3.5% against the dollar YTD) and has again become the worst-performing Asian currency this calendar year to date.
Also read: Tata Motors Commercial Vehicles shares debut at 28% premium. Should investors stay on board?The Chinese yuan, on the other hand, has in fact appreciated 2.6% YTD, underscoring the extent of rupee underperformance.It seems the market has not given the RBI enough time to cleanse short positions that it accumulated around 88.80 (RBI short forward book stood at USD 53bn as on August end and the guesstimate is that it may be upwards of USD 60bn currently).
The market certainly seems to be wanting to take the RBI on. It will be interesting to see whether the RBI still continues to defend the 88.80–89 level or opts to leave some powder dry in case the rupee weakens further.
Contours of the trade deal, if done with the US, will have to be closely analysed from the point of view of long-term implications. While the trade deal may bring immediate respite to exporters as punitive tariffs may get withdrawn, the long-term implications for the rupee may be negative.
Continuing to purchase crude from Russia could have opened up doors for making payments partially in rupee, at least over the coming years. However, halting purchases from Russia and purchasing from the US may shut the door for making payments in rupee. It would be a setback in terms of ambitions to internationalise the rupee over the longer term.
We expect pressure on the rupee to continue over the medium term but expect the RBI to smoothen the pace of rupee depreciation.
Purely from a REER perspective, though, the rupee seems to be fairly valued at this point.
(Abhishek Goenka, Founder & CEO of IFA Global)
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(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times.)
