What Drove the Rupee’s 0.48% Gain Against the US Dollar on Wednesday

The rupee rose 46 paise on Wednesday to close at 94.45 per US dollar. This was its strongest close since September 4. The gain came despite a weaker broader equity market. The previous day, the rupee ended 2 paise lower, breaking a six-session winning streak.

How Has the Rupee Moved in October?

Which Factors Supported the Rebound?

Three factors supported the recovery:

• Hopes that India and the US will sign a trade deal
• Foreign dollar inflows linked to the Jio Platforms IPO
• Recent Reserve Bank of India (RBI) measures to keep currency movements orderly

Where Do India and US Trade Talks Stand?

On Tuesday, US President Donald Trump told reporters at the White House that the two countries were close to finalising a trade deal after more than a year of negotiations. US Secretary of State Marco Rubio held talks in Mumbai with External Affairs Minister S Jaishankar and said only a few issues remained. Commerce Minister Piyush Goyal has said the first tranche of the deal is in its final stages.

Negotiations stalled after the February framework was agreed.

How Did Jio IPO Flows Affect Dollar Supply?

Jio Platforms’ initial public offering raised $3.1 billion and has been described as the largest in India’s history. Aamir Makda, commodity and currency analyst at Choice Broking, said the rupee’s strength came mainly from foreign dollar inflows tied to the IPO, along with support from the RBI.

According to Makda, foreign investors mostly used sell/buy swaps during the allotment process:

• Investors sell dollars for rupees in the spot market
• They agree to buy the dollars back within a short period, usually under a week
• These spot dollar sales add to dollar supply and support the rupee

What Steps Did the RBI Take Earlier in October?

The RBI’s measures were its strongest action since the 2013 currency crisis. They included:

• A dollar window for public sector oil companies
• Stricter documentation rules
• A ban on rebooking cancelled rupee derivative contracts
• A new Foreign Exchange Risk Reserve, under which banks must hold cash that earns no interest, equal to 20% of the rupee notional value of qualifying contracts

These steps moved some dollar demand from oil companies away from the spot market and made some importer hedges more expensive. RBI Governor Sanjay Malhotra said the central bank would do whatever was needed to keep currency moves orderly. He also said the RBI had seen significant speculation in currency derivatives.

What Pressures Remain on the Rupee?

India imports a large share of its oil, so higher crude prices usually increase demand for dollars. In May, the rupee was the worst-performing currency in the Asian basket.

Final Outlook

Source: NDTV Profit