Biggest rupee defence in a decade draws line under 97 per US dollar

India's most robust currency defense in over a decade is reinforcing expectations among traders and analysts that the central bank will take all necessary steps to prevent the rupee from falling below 97 per US dollar. This threshold is now viewed as a new floor by market participants, following the Reserve Bank of India's (RBI) unveiling of its toughest trading curbs since 2013.

The rupee surged 1.2 percent on Monday (October 12) to 95.5963 per US dollar, moving away from record lows near the 97 level it had approached multiple times since May. "It is absolutely evident now that 97 per dollar is the RBI's line in the sand for the rupee," said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership in Mumbai.

The RBI's message is that the rupee's decline has been too sharp, and the central bank is prepared to do whatever it takes to prevent a new record low. Australia & New Zealand Banking, Credit Agricole, and Malayan Banking also consider 97 as the key level for the RBI. The RBI introduced new measures, including a special window for state-run oil companies' US dollar needs and a reserve requirement on certain foreign-exchange derivatives.

The central bank, which raised interest rates last week and signaled openness to further tightening, intervened again in the onshore market on Monday to support the rupee. RBI measures, such as a reserve requirement on daily basis and an open-market bond sale, are seen as reinforcing 97 as a temporary line in the sand for the rupee.

The rupee has weakened around 6 percent this year, one of the worst performances in Asia, and RBI Governor Sanjay Malhotra has stated that it is undervalued on some measures, with markets potentially being irrational in the short term.