RBI expected to tame rupee swings following record low, say traders

The Reserve Bank of India (RBI) is set to continue its efforts to limit drastic fluctuations in the rupee, following its recent plunge to a record low on Friday, sparking speculation about the RBI’s potentially easing its control over the currency, traders said.

Over the past few months, the RBI's consistent intervention in the foreign exchange market had effectively subdued exchange rate volatility.

The sudden and steep decline on Friday, with the rupee hitting an all-time low of 83.43 against the dollar during domestic trading's final moments, caught traders off guard. A senior foreign exchange trader at a state-run bank noted that while the RBI had intervened earlier in the session, its absence towards the end contributed to the rupee's descent to historic lows.

However, Mandar Pitale, head of treasury at SBM Bank India, expressed confidence that the RBI would not permit unchecked depreciation of the rupee despite Friday's downturn.

Following central bank intervention, the rupee saw 0.2 per cent uptick on Tuesday, settling at 83.28. Pitale expects the currency to trade within a narrow range of 83.15 to 83.35 throughout the week.

Another foreign exchange trader at a private bank observed that the RBI's intervention had somewhat stabilised the currency pair, indicating expectations for limited movement in the coming sessions.

The unexpected decline on Friday, the most severe since September 2023, took the market by surprise, especially given the rupee's relatively stable performance over the past year, as indicated by a March Reuters poll.

Factors such as weakness in the offshore Chinese yuan and dollar outflows contributed to last week's rupee slump. Additionally, outflow in the final minutes of trading on Friday exacerbated the situation, according to a trader at a foreign bank.

The offshore non-deliverable forwards (NDF) market also witnessed considerable impact, with the one-month NDF hitting 83.79, suggesting a spot rate of approximately 83.73 against the dollar.

A senior foreign exchange trader at a foreign bank noted that post onshore closure on Friday, offshore players reduced their long INR positions, further influencing the currency's movement.

Looking ahead, traders anticipate the RBI's continued intervention to steer the market in the coming days.

(With Reuters inputs)