RBI Intervention and Impact on Rupee: Key Factors Influencing Rupee Movement

The Indian rupee has been trading relatively unchanged on October 15, as the Reserve Bank of India’s (RBI) likely intervention through dollar selling balanced out the demand for the U.S. dollar from foreign portfolio investments. The rupee’s movement is a crucial indicator of the country’s economic stability, and several factors contribute to its fluctuations. Let’s explore how RBI’s actions and other key factors impact the rupee’s movement.

RBI Intervention: Stabilising the Rupee

One of the primary ways the RBI manages rupee volatility is by intervening in the foreign exchange market. When the rupee weakens significantly against the U.S. dollar, the RBI steps in to sell dollars and buy rupees, which helps reduce the supply of dollars and strengthen the rupee. Conversely, the RBI may buy dollars to prevent excessive rupee appreciation.

In the current scenario, the RBI’s intervention was crucial as the rupee crossed the Rs 84.12 level last Friday. However, following the central bank’s actions, the rupee has been trading within the range of the large candlestick pattern formed on Friday, indicating a cautious market sentiment.

Foreign Capital Flows: Impact of FII Selling

Foreign Institutional Investors (FIIs) play a significant role in determining the demand and supply of the rupee. Recently, FIIs have sold a staggering Rs 62,126.15 crore in the cash segment of Indian markets since the start of October. This large-scale outflow of foreign funds has created demand for the U.S. dollar, contributing to the weakening of the rupee. Additionally, FIIs have also started selling Indian debt, further increasing the pressure on the domestic currency.

Despite the rupee’s recent drop, we believe the currency could find support due to strong RBI interventions, and the upcoming Hyundai IPO is not expected to attract significant foreign investment.

Global Crude Oil Prices: A Major Factor

India’s heavy dependence on crude oil imports means that any fluctuations in global oil prices can significantly impact the rupee. When oil prices rise, India has to spend more dollars to import oil, increasing the demand for the U.S. dollar and putting pressure on the rupee to depreciate. Currently, rising global crude oil prices are contributing to a weaker rupee, and this trend is likely to continue unless there is a sharp reversal in oil prices.

Interest Rate Differentials: U.S. Fed’s Role

Interest rate differentials between India and major economies like the United States also play a critical role in influencing the rupee’s movement. When the U.S. Federal Reserve raises interest rates, it makes U.S. assets more attractive to investors, causing capital outflows from emerging markets like India. This reduces demand for the rupee, leading to its depreciation. On the other hand, when the Fed lowers rates, the rupee can appreciate due to increased capital inflows into India.

Market Sentiment and Technical Analysis

On the technical side, the USD/INR pair is currently showing the formation of an inside bar, meaning the price action is trading within the high and low of the previous trading session. This indicates a period of consolidation, and any breakout from this range could set the direction for future movements. Strong resistance exists at the Rs 84.12–Rs 84.18 level, and any significant RBI intervention at this point could trigger a pullback, pushing the rupee below Rs 84.

Conclusion: A Delicate Balance

The rupee’s movement is shaped by various factors, including RBI’s interventions, foreign capital flows, global crude oil prices, and interest rate differentials. The RBI’s timely interventions can provide temporary relief, but sustained pressure from external factors like rising oil prices and foreign capital outflows may continue to challenge the rupee in the near future. Investors and market participants will closely watch the Rs 84.12 level, as any break or pullback could determine the rupee’s trajectory in the coming days.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.