Rupee Gives Up Early Gains Despite RBI Measures To Draw Forex Flows

The rupee opened stronger on Thursday in response to measures announced by the central bank to boost dollar inflows. The local currency, however, failed to hold on to the gains and weakened in afternoon trade.

The rupee opened at 79.07 against the dollar compared to its previous close of at 79.30. The domestic currency hit a record low of 79.37 intraday on Wednesday. The rupee closed at 79.18 against the dollar.

The rupee has weakened about 6% since the start of the year, according to Bloomberg data.

The newly unveiled measures from RBI improved sentiments and also falling oil prices boosted rupee's appeal, said Anindya Banerjee, vice president for currency derivatives and interest rate derivatives at Kotak Securities Ltd.

”Even though we do not expect any significant increase in capital flows over the near term but it will have a positive sentimental impact. Once the risk appetite improves in global markets, foreign capital flows can increase in India,” he said. “For the time being, we could see dollar-rupee trade within a range of 78.70 and 79.50 on spot.”

Radhika Rao, senior economist at DBS Bank, said while active forex intervention had been the modus operandi to defend the rupee in the last few weeks, the central bank returned its focus to boost dollar inflows to offset a widening current account shortfall and ease onshore dollar tightness. Incremental flows are likely to be absorbed to replenish the reserves stock, she said.

The RBI's measures include liberalising limits and interest rate caps for external borrowings, and are help bringing some relief in an increasingly adverse global scenario.

The problem at present of inflows not coming into the market is due to rate hikes from the U.S. Federal Reserve and expectations of a weaker currency, Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, said. Exporters may start selling because the RBI may take more steps to prevent appreciation of the dollar, Bhansali said. In addition, importers may buy near term and wait for hedging more to see how the pair behaves in the next few days.

The dollar index above 107 seems to be quiet in an overbought state and should see some correction before the next round of downside for the euro and British pound, he said.