Rupee scales two-year peak of 63.7 vs dollar

The rupee strengthened sharply on Wednesday to close at a twoyear high of 63.7 to a dollar, highest since July 22, 2015.

Generally, when there is a rate cut, the local currency should depreciate. On Wednesday, though, it rose even as the Reserve Bank of India (RBI) cut its policy rate by 25 basis points (bps) and stock indices fell.

Around 12:40 pm, say currency dealers, a large Indian exporter, possibly a conglomerate, sold a huge amount of dollars in the market. That led the rupee to fall below 64 a dollar, after having opened at 64.12. After the RBI deputy governor said the central bank was comfortable with a real interest rate of 1.75 per cent, which is the difference between the policy repo rate of six per cent and projected inflation of a little over four per cent, the rupee started strengthening more.

“The real interest rate comment was interpreted by some in the markets that the chance of large rate cuts in the future is very limited,” said Abhishek Goenka, managing director of IFA Global, a currency consultancy.

A high interest rate would ensure foreign investors remain attracted to Indian assets. This brings more dollars into the market and the rupee strengthens.

A simpler explanation of the rupee’s strength was proposed by a senior currency dealer with a foreign bank. RBI had been trying to protect the 64 level for quite some time. On Wednesday, perhaps because of the policy announcements, nationalised banks were not buying dollars in the market but came only near the close, pulling down the rupee from its intraday high of 64.6 to its close of 64.7.

“If the real interest comment was so important, bond yields would have moved sharply, too. It didn’t,” said the dealer. The 10year bond yield closed at 6.46 per cent, only two bps higher than its previous close.

A high interest rate would ensure foreign investors remain attracted to Indian assets