Indian rupee conducted a strong trade against the US dollar in early trade on Wednesday, and this was due to the decisive actions of the Reserve Bank of India (RBI) in the spot and non-deliverable forward (NDF) market. USD/INR pair went down by over 1 per cent and stood at around 90.00 level as compared to its all-time high of 91.56.
The market participants observed that such a move by the central bank was well expected, owing to the deteriorated strength of the domestic currency. Before the rebound, the rupee was already the worst-performing Asian currency against the US dollar, and has already lost almost 6.45 per cent of this year. The intervention of RBI assisted in regaining some confidence and preventing extreme volatility of the foreign exchange market.
The rebound notwithstanding, there are still underlying forces on the rupee. The continued outflow of foreign capital also remains a burden to sentiment which is mainly fueled by the lack of a real trade deal between India and the United States. The long-running trade standoff has also contributed to the increase in demand of the dollar by Indian importers that has put an additional strain on the local currency over the past few weeks.
The Foreign Institutional Investors (FIIs) have continued being steady sellers of the Indian equities further putting pressure on the rupee. Statistics indicate that during the last 11 months, FIIs have been selling net in seven months. The value of shares sold by the foreign investors in the month of December alone was 23,455.75 crores, which illustrates the persistent risk-aversion towards the emerging markets, including India.
Regarding monetary policy, the most recent action by the RBI Governor, Sanjay Malhotra, was an indication that it would remain accommodative. In one of the interviews, he said that interest rates will probably continue to be low through a longer duration, explaining that it will help to boost the economic growth. Malhotra also termed that the new headline Gross Domestic Product (GDP) figures were shocking since they have led the central bank to tailor its forecast of growth.
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