- June special measures draw far more FX than markets expected
- Reserve boost gives RBI greater intervention firepower
- Inflows balloon RBI's FX forward book, raising future risks
MUMBAI, Sept 3 (Reuters) - The Indian rupee climbed to a two-month high on Thursday after a much larger-than-expected $136.4 billion raised through one-off measures improved the currency's outlook at a time when renewed U.S.-Iran conflict has pushed crude oil prices higher and contributed to a global bond selloff.
The massive fundraising does, however, further swell the Reserve Bank of India's already-record future dollar liabilities, potentially putting a ceiling on the rupee's appreciation, traders and analysts said.
The rupee opened at 94.30 per dollar, its highest level since late June, after settling at 94.97 on Wednesday. The unit has risen more than 1% this week, making it among the best-performing currencies in Asia.
BOOSTING FIREPOWER FOR RUPEE DEFENCE
The inflows will further boost India's foreign-exchange reserves, which jumped to an all-time high of $729.3 billion last month, providing the central bank more dry powder to defend the local currency and absorb oil and other external shocks.
DBS expects reserves to rise to over $750 billion in the coming week.
India's inflows "materially strengthen" the RBI’s hand, said Kunal Sodhani, head of treasury at Shinhan Bank.
"The key is that the RBI now has considerably more flexibility to resist both excessive depreciation and excessive appreciation."
The larger dollar cushion leaves the RBI better placed to absorb the pressures from oil prices, which Sodhani reckons remain the biggest risk for India.
Crude prices have resumed their climb following renewed strikes between the U.S. and Iran, threatening to widen India's trade deficit and add to inflationary pressures in the oil-importing economy. Brent crude has rallied 7% this week, hitting its highest level since late July.
At the same time, expectations that the Federal Reserve could raise interest rates this month have pushed U.S. yields higher and kept the dollar broadly supported. Odds of a Fed rate hike at this month's meeting are now at 2-in-3.
The 10-year U.S. Treasury yield is hovering near its highest level in almost three years.
The RBI's considerable firepower in defending the rupee is "already noticeable in the recent shift in the intervention bias," analysts at DBS said. The central bank has stepped up intervention through dollar sales, Reuters reported on Wednesday.
A DOUBLE EDGED SWORD
While boosting headline reserves, the flows via these schemes are adding to the RBI's forward book, which is already at an all-time high of $137 billion.
Shinhan's Sodhani said the RBI will need to manage its ballooning forward-book exposure, using any sizeable rupee rallies to pare back its position.
Paring the short dollar forward exposure will limit the scope for a sharp appreciation in the rupee, analysts have said.
Still, the jump in the RBI's FX reserves offers it ample firepower, Nomura analysts said in a note. They estimate India's balance of payments will be in a surplus of about $66 billion in the current fiscal year, against a deficit of $23.6 billion in the previous year.
Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala and Ronojoy Mazumdar
Source: Reuters