Defending INR: RBI wades into currency pool, and swims rupee to safety

Reserve Bank of India (RBI) heavily intervened in the currency market on Friday to strengthen the Indian rupee from its record low level reached on Thursday. 

Some recovery in the local stock markets, as well as broad-based dollar weakness, helped rupee gain back some of its value. 

The rupee closed at 68.47 a dollar, from its previous close of 68.75 as the central bank intervened at multiple points whenever rupee showed some depreciation pressure, said several currency dealers who did not wish to be named. 

The local currency had opened at 68.66 a dollar and depreciated as much as 68.70 a dollar before the RBI started intervening in the market. 

"There was heavy selling (of dollar) by the RBI to defend the rupee. Besides, it removed some of the rupee liquidity from the system, too," said a senior currency trader with a foreign bank who did not wish to be named. 

Some of the recovery in rupee was also led by dollar giving up some of its gain against global currencies. All major currencies in the region gained against the dollar, but rupee gained the most in the day. The local currency gained 0.40 per cent intraday, while Japanese yen rose 0.38 per cent.

That rupee would strengthen from its Thursday's low was predicted in the foreign non-deliverable forwards (NDFs) market. The market was showing that rupee should scale back from the record low 68.87 a dollar level it had reached on Thursday. 

But a poll of 10 currency market participants by Business Standard said rupee could test 70 a dollar in the coming days, but should retract to 68-69 level. The US Federal Reserve will meet mid-December and is widely expected to increase rates from the near zero level. 

After Donald Trump’s victory in US presidential polls and the Fed saying that the rate cuts could be in December, Asian currencies have suffered. In a month, rupee has fallen 0.49 per cent, more or less the same as other Asian currencies. Japanese yen, in this period, has fallen 1.76 per cent. (NDF is a cash-settled, short-term forward contract in a thinly traded or nonconvertible foreign currency against a freely traded currency, where the profit or loss at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. The gain or loss is then settled in the freely traded currency. A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.)