(Bloomberg) -- Rupee traders, lulled into a sense of complacency by the Reserve Bank of India's massive dollar purchases, are in for a rude awakening as the monetary authority takes a break from soaking up the greenback.
The rupee was the best-performing currency in Asia on Friday, up 0.6% to 73.43 to a dollar. It is up about 2% for the week, the most since 2018. The dollar/rupee pair has also breached a key support at its 200-day moving average, a level it has held for a year.
RBI has so far been a relentless buyer of dollars to build reserves, a strategy that has made the rupee among the region's weakest currencies this year. The authority bought $30 billion of forex in the four months through July to bolster what is already the world's fifth-largest reserves, according to Australia & New Zealand Banking Group Ltd. But traders said it has moved away this week amid a spate of lumpy inflows and a growing inflation threat.
“The RBI seems to be adopting a more hands-off approach now versus intervention,” said B. Prasanna, group head for global markets sales, trading and research at ICICI Bank Ltd. in Mumbai. “Given that the current inflation spike has been due to supply disruptions, maybe the RBI is looking at rupee appreciation more favorably since it does have a softening impact on landed prices of imported products, mainly crude oil.”
The rupee could rise toward the 73 mark if the spate of foreign fund flows continue, Prasanna said. Overseas investors have plowed more than $6 billion into Indian shares in August, set for the highest monthly inflow since March last year.
(A previous version of this story corrected wording in lede.)
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