India Rupee’s Rally Leaves Traders Gauging RBI’s Forex Strategy

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India’s rupee hit a three-month high after breaking out of a tight trading band, boosted by strong inflows and expectations that the central bank may be slowing its purchases of dollars.

The rupee rose as much as 0.6% to 74.5562 per dollar, its highest since March 27, before closing up 0.5%. The currency has strengthened 1.3% this week in Asia’s best performance.

The currency rallied 0.8% on Thursday, with traders attributing the strength to inflows from Reliance Industries Ltd.’s stake sales in its digital unit and the Reserve Bank of India stepping away from buying dollars. The prospect of a rare current-account surplus following robust foreign flows and low oil prices has burnished the rupee’s outlook, which was the region’s biggest decliner in the first six months of 2020.

“India’s balance of payments surplus is one of the strongest in recent years, and we see that continuing to support the INR,” said Divya Devesh, head of Asean and South Asia FX research at Standard Chartered Plc in Singapore. “While the central bank is likely to continue with its reserves building, historically, they have not targeted specific levels.”

Overseas funds piled $4.2 billion into Indian stocks in the June quarter, the highest in Asia. Reliance’s unit Jio Platforms Ltd. alone has attracted about $16 billion via stake sales. The investment arm of Intel Corp. on Friday agreed to pay 18.95 billion rupees ($253 million) for a slice of Jio.

Despite the gush of inflows, the RBI has been resolutely purchasing dollars to build reserves, which have surged past $500 billion to a record. The central bank is estimated to have bought $17.2 billion in the seven weeks through June 19, according to Bloomberg Economics. Traders cited intermittent dollar buying by state-owned banks on Friday.

“The RBI seemed to intervene around noon to minimize volatility after yesterday’s swing,” said Jateen Trivedi, senior research analyst – currency & commodities at LKP Securities Ltd.

While accumulating reserve might slow the rupee’s ascent, it is unlikely to stop gains amid weakness in the U.S. dollar, StanChart’s Devesh said. He is recommending investors to ‘short’ USD-INR with a target of 73.50.
– Bloomberg.

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