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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 defending the currency.
The rupee was steady at 73.8375 on Friday, but is up 1.4 per cent for the week, the most since May. The dollar/rupee pair is also inching closer to its 200-day moving average at 73.7039, a key 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 regions 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.
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 in Mumbai. Given that the current inflation spike has been due to supply disruptions, maybe the RBI is looking at rupee appreciation more favourably 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 inflows continue, Prasanna said.
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