Rupee Strengthens Sharply Against US Dollar As RBI Announces Fresh Liquidity Measures

Rupee strengthened sharply against the US dollar as the Reserve Bank of India raised the interest rate ceiling on deposits on foreign currency non–resident accounts, and cut the cash reserve ratio to boost liquidity in the banking system.

The Indian unit rose 16 paise to the day's high of 84.57 a dollar against the greenback. It opened flat at 84.65 a dollar. The rupee closed at 84.73 a dollar on Thursday, according to data on Cogencis.

As of 11:15 a.m., the rupee was trading at 84.62 a dollar.

The central bank raised the interest rate ceiling on one–year FCNR deposits by 200 basis points to 400 basis points, in move to attract more capital inflows. Ceiling on FCNRB deposit rates on 3-5 year maturity also increased. FCNRB deposit rate relaxation will be available till March 31, 2025.

The RBI also announced to cut CRR by 50 basis points to 4%. The central bank will cut CRR in two tranches in fortnights beginning Dec. 14 and Dec. 28 at 25 basis each. The CRR cut will result in liquidity increase of Rs 1.16 lakh crore.

"These measures are likely to have a positive impact on sentiment as far as Rupee is concerned and offset the impact of CRR reduction," said Abhishek Goenka, founder and chief executive officer of IFA Global.

Also the governor mentioned that the intervention style in rupee was fostering macroeconomic and financial stability. Therefore, it's expected that the low beta, low volatility environment continue in the rupee, said Goenka.

The move from the central bank came as the Indian unit has been under pressure ever since US election result confirmed that Donald Trump is going to be the next president.

Trump's policies are likely to be favourable for the US dollar and treasury yields. The rise in safe–haven assets will drive out money from the emerging markets.

Trump's threat towards the BRICs nations to not to create a greenback alternative took the rupee to record low of 84.76 a dollar on Dec 3.