RBI backstop keeps Indian rupee stable, blunting importer dollar demand impact

The Indian rupee maintained stability on Wednesday as the Reserve Bank of India provided backing, countering growing dollar demand from importers and the effects of rising oil prices and Treasury yields, according to wire reports.

Opening at 94.89 against the U.S. dollar, the rupee briefly appreciated but later traded around the previous day's close throughout the session. By the end of the session, it settled at 94.97 per U.S. dollar, following a closing of 94.95 on Tuesday.

The Reserve Bank of India (RBI) may have intervened by selling dollars before the market opened and remained active to prevent any substantial currency volatility, traders suggested. The central bank has recently intensified its support for the rupee, utilizing a surge of deposits from non-residents to protect the local currency from the impact of soaring oil prices and mounting U.S. Treasury yields.

Krishna Bhimavarapu, an APAC economist at State Street Investment Management, opined that the Foreign Currency Non-Resident (FCNR) scheme had successfully achieved its goal of bolstering the external funding landscape and stabilizing the rupee. Bhimavarapu noted that the FCNR flows may have surpassed $100 billion.

The recent diplomatic tensions between the U.S. and Iran caused market turmoil, causing benchmark Brent crude to reach a peak of $97 per barrel and increasing the likelihood of supply disruptions. Although market participants anticipated the news to adversely affect the rupee, RBI actions managed to prevent a significant decline.

Moreover, the surge in oil prices fueled inflation concerns, prompting a rise in U.S. Treasury yields. The yield on the 10-year note hit its highest level in nearly three years. Over the past two days, the RBI's dollar sales and inflows facilitated through foreign banks have helped strengthen the currency despite these dual challenges.

Alok Singh, Head of Treasury at CSB Bank in Mumbai, indicated that as long as Brent crude remains below $100 a barrel, the RBI is expected to continue supplying dollars to maintain currency stability, with the rupee likely to stay within the 94.50-95.50 range.