INR vs USD: Why Rupee Fell After RBI Intervention Before April 2 Rebound? - Motilal Oswal Weighs In

Ahead of the rupee surging 1.6% to hit Rs 93.19 against USD after RBI's intervention, brokerage house Motilal Oswal pointed out at that one point, rupee had already strengthened but quickly reversed hard, Bank Nifty crashed 4%, resulting in Rs 4k crore loses for banking entities.

India's central bank had recently capped Net Open Position (NOP-INR) for banks at $100 million. 

Also Read: Global Rate Cuts Stalled: Central Banks On Alert Over West Asia War

3 Factors Behinds Rupee's Fall Before April 2 Rebound 

The visible trigger behind this is negative global cues such as crude oil upto $115+, War tensions rising, dollar index strengthening, and heavy sell off by FIIs, totalling $500 million per day.

However, this is an occurrence even after RBI forced banks to sell dollars by limiting positions. This resulted in a change in stance from banks holding large USD positions, and to maximum $100 million imbalance.

This led to heavy dumping of US dollars in the morning. While the rupee briefly strengthened 93.5, things flipped as the markets realised that cheap USD is available.

The one's who capitalise on this opportunity includes oil companies, importers, and corporates, who brought aggressively, resulting in supply rise, and demand being absorbed instantly.

The second trigger kicked in with banks being forced into losses.

Here’s what happened behind the scenes:

• Sold dollars cheap in India
• Had to buy back expensive offshore

The estimated loss is estimated at Rs 4,000 crore for banking entities, resulting in bank stocks falling sharply.

However, the real reason rupee didn’t hold gains is as result of RBI not fixing demand and only supply.

Demand drivers still intact:

• Oil imports
• FII outflows
• Global risk-off

So, even after intervention, rupee slipped again to 94.7. Meanwhile, the resultant rupee crash is not a due a one-off move by RBI but because RBI altered the market structure.

Earlier, it was hjigh liquidity, and easy dollar access. Now, it is tighter limits, and reduced flexibility, resulting in  every dollar trade becomes harder, creating a liquidity crunch.

Example: If a company needs $500M, earlier it could secure this from either one or two banks. However, it will now require to secure the same from multiple banks. This creates slower execution, higher cost, and price volatility.