RBI Steps In to Steady Rupee Amid Ongoing Pressure
The Reserve Bank of India (RBI) is actively intervening in the foreign exchange market to steady the rupee, which has been trading near a two-month low of 96 per US dollar. The central bank's efforts have helped calm the situation, but traders warn that the risk doesn't disappear with the RBI's smoothing. Lower oil prices and cooler expectations for another Federal Reserve rate hike have provided some relief, but the underlying pressure on the rupee remains.
The rupee's recent trading has been characterized by a telltale rhythm: it slips to a low, then rebounds, suggesting RBI intervention. The central bank can sell dollars from its foreign exchange reserves to smooth out the move and signal that it doesn't want a quick break beyond 96. This approach may shift the stress into USD/INR hedges, making day-to-day moves in the spot rate appear calmer than the underlying pressure.
Traders are closely watching USD/INR option implied volatility and skew as a barometer of stress, rather than focusing on the next tiny tick in the spot rate. The RBI's efforts to manage the rupee's value may have a one-sided impact, making any break more abrupt if demand for dollars overwhelms the central bank's smoothing.