The Reserve Bank of India's daily currency market intervention, estimated at about $1 billion, per four bankers, is slowing but not halting the rupee's slide, with the currency hitting a string of record lows under pressure from high oil prices and surging U.S. Treasury yields.
The RBI has been selling dollars every day via state-run banks in the past one-and-a-half weeks to stem pressure on the rupee, the bankers said.
India imports around 90% of its crude oil requirements, making higher for longer oil prices a key challenge, alongside subdued capital inflows and muted exporter dollar sales.
The absence of a resolution to the U.S.-Israeli war with Iran is leaving the rupee vulnerable to further depreciation against the dollar, even after its near 8% fall so far this year made it Asia's worst performing currency.
Bankers estimate the RBI's daily dollar sales in the spot market to be between $800 million to $2 billion in recent days, based on USD/INR volumes, broker inputs on state-run bank activity and order flow patterns.
Central bank intervention has moderated the pace of losses, rather than reverse them, with the rupee on a nine-day slide, nearing the 97 per dollar mark for the first time.
The RBI did not immediately respond to an email seeking comment.
One banker, whose estimate is at the higher side of around $2 billion, said the intervention is "in-and-out", rather than continuous through the session. This person, and other bankers cited in the story, requested anonymity as they are not authorised to speak publicly.
"For the RBI, the aim is to manage the pace of the rupee’s decline and prevent it from turning into a self-fulfilling spiral," said Gaura Sen Gupta, chief economist at IDFC FIRST Bank.
Based on her calculations from reserve money data, she estimates that the RBI sold about $5 billion in the first week of May.
Sen Gupta expects further steps by the central bank to address current account pressures and bolster capital flows, after the central bank cracked down on chunky arbitrage trades that had amplified pressure on the rupee.
The surge in U.S. Treasury yields, driven by expectations of Federal Reserve rate hikes in response to Iran war-linked inflation concerns, is compounding pressure on the rupee.
Market pricing of potential Federal Reserve rate hikes this year has climbed, a marked shift from pre-conflict sentiment, when markets expected the next move to be a rate cut.
The concurrent pressures are skewing market flows against the rupee.
"Exporters are delaying conversion of proceeds ... while importers are front-loading demand and hedging aggressively. The result is a persistent imbalance in FX flows that intervention alone struggles to offset," said Dhiraj Nim, FX strategist and economist at ANZ.
"Outflows from the financial account only add to the pressure." (Reporting by Nimesh Vora, Jaspreet Kalra; Editing by Ronojoy Mazumdar)
