Rupee ends stronger, paring gains as RBI intervenes

The rupee ended stronger against the dollar on Thursday, after the US Federal Reserve signalled it would raise interest rates at a slower pace than earlier expected, reducing the risk of emerging-market outflows.

Though the rupee continues to be vulnerable to rate increases in the US, the impact is seen as short-lived by experts.

The US Fed said it would end its pledge to be “patient” in normalising monetary policy. What helped the rupee were other dovish statements. The Fed opened the door further for an interest rate rise as early as June but signalled a more cautious outlook for economic growth and cut its projected interest rate path.

The rupee ended at 62.52 to a dollar, compared with the previous close of 62.69. It had opened stronger by 31 paise at 62.39 and during intra-day trade, touched a high of 62.36. Dealers said state-run banks were seen buying dollars on behalf of the Reserve Bank of India (RBI), resulting in the currency giving up some gain.

In fact, among major global currencies, the rupee was one of the few which ended stronger.

“This month, the rupee will trade in the range of 62-63 a dollar because ahead of the financial year closing, dollar demand from corporates might be there,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

After rising for five weeks, RBI's foreign exchange reserves fell $286.3 million to $337.79 billion in the week ending March 6. In the past, RBI has been mopping dollar flows to boost its reserves.

RBI Governor Raghuram Rajan said in Delhi on Wednesday that the country was prepared to deal with the consequences of a US Fed move towards an increase in interest rates, including heightened market volatility. Rajan also said forex reserves were “comfortable”, and the current account deficit was under control.

Some experts estimate when the Fed starts raising rates, there could be outflows worth $30 bn from Indian markets. “We will be vulnerable to the Fed's rate hikes but the impact will be short-lived because the Fed will be looking at the labour market and inflation and will be judgemental once the data comes in. Now, the challenge for the markets will be whether the Fed will hike interest rates in 2015 or in early 2016,” said Suresh Nair, director, Admisi Forex India. He feels in the next six months the rupee might trade in the band of 62-64 a dollar and RBI would continue to mop dollar flows.

In the past, RBI had taken various steps to ensure a limited impact on Indian markets when the Fed starts raising rates. A key step is that foreign portfolio investors shall not be allowed to make any further investments in debt instruments having minimum residual maturity of three years.