(Bloomberg) -- The Indian rupee's outsized gains over the last three sessions is spurring talk that the Reserve Bank of India may have loosened its grip over the currency.
The rupee has rallied 1.6% in the previous three sessions to post its biggest gain for the period since March 2
020. The exchange rate had been moving within a range of 74-75 per dollar in the past two months. It edged higher on Wednesday to its strongest level since June.
The RBI has previously said its currency interventions are aimed at soothing volatility. However, traders believe the central bank has been mopping up large amounts of dollars to keep the rupee from getting swayed by a spate of share sales and debt issuance by companies.
Now, the currency spike is fueling chatter that the RBI may be backing off as a glut of rupee liquidity that results from these operations could fuel inflation.
Part of the RBI's “hands-off foreign exchange strategy” in August could be attributed to avoiding the excess liquidity situation to be exacerbated by its forex intervention, said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. The central bank also is looking at possibly making some profit off the rupee gains for its own books, she said.
The RBI's comments on Tuesday, support this argument. Governor Shaktikanta Das said the central bank plans to conduct more operations to manage any unanticipated surge in banking-system cash due to inflows. The RBI didn't immediately comment when reached on Wednesday.
Fleeting Gains
Still, traders are reluctant to boost bullish bets on the rupee as previous such episodes have been short-lived, with the RBI quickly returning to hoover up dollars.
“The RBI is allowing the rupee to appreciate in line with global markets,” said Anindya Banerjee, currency strategist at Kotak Securities Ltd. “However, the RBI may not allow sharp gains beyond 72.50 to a dollar.”
The rupee rose 0.1% to 72.9725 on Wednesday. It's Asia's best-performing currency this quarter with gains of nearly 1.9%.
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