India central bank to limit sharp swings in rupee after slip to record low

MUMBAI: India's central bank will continue to curb sharp swings in the rupee, traders said, after it fell to a record low on Friday, spurring speculation the Reserve Bank of India (RBI) may be loosening its grip on the currency.

Persistent intervention by the RBI in the foreign exchange market over the past several months had dampened exchange rate volatility.

Friday’s sharp decline caught traders by surprise as the rupee fell to an all-time low of 83.43 against the dollar in the closing minutes of domestic trading.

While the RBI had intervened earlier in the session, its absence towards the end pushed the rupee to record lows, a senior foreign exchange trader at a state-run bank said.

Traders quoted in the story declined to be named because they are not authorised to speak to the media. Despite Friday's decline, "don't think the RBI will allow runaway depreciation on the rupee", Mandar Pitale, head of treasury at SBM Bank India, said.

On Monday, the rupee rose nearly 0.2 percent, aided by central bank intervention, to settle at 83.28. SBM Bank's Pitale expects it to hover between 83.15 and 83.35 this week.

The RBI's intervention seems to have "cooled the pair", a foreign exchange trader at a private bank said, predicting a tight range over the next few sessions.

Friday's unexpected fall, which was the worst since September 2023, surprised the market which saw a rangebound rupee and slight gains in a year's time, as reflected in a March Reuters poll.

Weakness in the offshore Chinese yuan and dollar outflows hit the rupee last week, and a lumpy outflow in the last two-three minutes pushed it past previous lows on Friday, a trader at a foreign bank said.

The decline was worse in the offshore non-deliverable forwards (NDF) market, where the one-month NDF hit 83.79, implying a spot rate of around 83.73 to the dollar.

"The move post onshore close on Friday was offshore reducing their long INR bets," a senior foreign exchange trader at a foreign bank said.

The RBI's intervention, seen on Monday, is likely to guide the market going ahead, the trader said. Meanwhile, India's current account deficit narrowed in the October-December quarter, largely due to higher service exports, the central bank said on Tuesday.

The deficit was $10.5 billion, or 1.2 percent of GDP in the third quarter of fiscal 2023/24, compared with $11.4 billion, or 1.3 percent of GDP, in the preceding quarter, which was revised upwards from $8.3 billion, or 1 percent of GDP.

The deficit stood at $16.8 billion or 2 percent in the same quarter a year ago. The median forecast in a Reuters poll of 21 economists was for a deficit of $12.1 billion. "Services exports grew by 5.2 percent on a year-on-year basis on the back of rising exports of software, business and travel services," the Reserve Bank of India said in a statement.

Net services receipts increased both sequentially and from a year ago, which helped cushion the current account deficit (CAD), the RBI said.

"Buoyancy in services exports along with a recovery in global demand suggests that CAD for 2023-24 is likely to be lower than last year," said Aditi Gupta, an economist at Bank of Baroda.

Next fiscal year, a combination of lower global rates and a pickup in global and domestic growth might push CAD higher but "within a manageable range," Gupta said.

Merchandise trade deficit widened marginally to $71.6 billion in the quarter, from $71.3 billion a year ago, the RBI said. The merchandise trade deficit in February stood at $18.71 billion compared to $17.49 billion in January.

Private transfer receipts, which are mainly remittances by Indians employed overseas, increased 2.1 percent on-year to $31.4 billion.

The country's balance of payments was a surplus of $6 billion in the December quarter, compared with a surplus of $11.1 billion a year ago. The surplus, however, widened sharply from $2.5 billion in the September quarter.