By Nimesh Vora and Jaspreet Kalra
MUMBAI (Reuters) – The Reserve Bank of India’s inaction to the rupee’s ongoing rally, which lifted it above 85, surprised market participants and sent traders scrambling to adjust positions after the central bank did not step in to absorb dollars as was expected.
The rupee rose to a peak of 84.9675 in early trade on Friday before trimming gains and was last quoted at 85.2650, up 0.2% on the day.
Recession worries stoked by sweeping U.S. tariffs dragged the dollar, helping the rupee rise above 85 for the first time this year and extending its rally into April after seasonal and portfolio dollar inflows boosted it last month.
Traders have pointed out that while the RBI would routinely intervene to buy dollars during periods of rupee strength last year, the central bank appears to have held off this time even as the rupee climbed more than 2.5% in around three weeks.
The RBI did not immediately respond to a request seeking comment.
The currency’s surprising rally has also prompted a sharp unwinding of short bets against the currency, per a Reuters poll.
The rupee’s recent gains are in line with its Asian peers and the RBI allowing that opens up room for a more expansionary monetary policy to support growth, said Dhiraj Nim, an economist and FX rates strategist at ANZ.
The valuation gains accruing to FX reserves have also turned positive, reducing the urgency to buy dollars and preventing India’s FX policy from drawing attention while a trade deal with the U.S. is being negotiated, Nim said.
Expectations of sharper policy easing by the RBI have increased amid concerns about India’s growth outlook being hurt by U.S. tariffs. Citi and Goldman Sachs both raised their expected quantum of rate cuts by the RBI this year.
However, that has done little to dent the rupee’s stride in the face of a weaker dollar, even as traders and analysts caution that the global growth shock of U.S. tariffs is bound to lead the rupee lower alongside its regional peers.
Barclays currently recommends taking a long position on the 3-month dollar-rupee non-deliverable forward with a target of 90. The 3-month NDF was last quoted at around 85.75.
(Reporting by Jaspreet Kalra, Nimesh Vora; Editing by Janane Venkatraman)
