Forex
India cenbank aiming at multiple targets with simultaneous purchase, sale of dollars – bankers
© Reuters. FILE PHOTO: A police officer walks past the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai, India, April 6, 2023. REUTERS/Francis Mascarenhas/File Photo/File Photo
By Nimesh Vora
MUMBAI (Reuters) – The Indian central bank’s simultaneous purchase and sale of U.S. dollars in recent weeks has puzzled bankers, who speculate there may be multiple objectives behind the operations.
The Reserve Bank of India (RBI) has been buying dollars amid hefty foreign inflows, and has, at the same time, been selling them to prevent the rupee breaching its record low, several traders said.
Overseas investors have pumped in $3.7 billion into Indian equities and $800 million into debt in the six sessions in December, according to the National Securities Depository.
Still, the rupee is nearly unchanged month-on-month and has traded in a narrow 15-paisa range.
The currency’s inability to appreciate points to the RBI absorbing the inflows, several traders and treasury officials said.
“It has to be the RBI (absorbing the flows),” a senior treasury official at a large private sector bank said.
“The price action and what I see on the screen clearly point to the RBI,” this person said, referring to the heavy buying interest and the smallest of dips in the dollar/rupee not sustaining.
The RBI did not immediately respond to an email by Reuters seeking comment.
The rupee was at 83.38 to the dollar on Tuesday, just shy of its lifetime low of 83.42.
The unit has been trading near its record low despite expectations the Federal Reserve will cut rates as soon as March next year.
Meanwhile, Asian peers have rallied.
“It’s puzzling – RBI’s heavy both-side intervention,” head of proprietary FX trading at a bank said.
On the one hand, the RBI is selling dollars to make sure the rupee does not weaken and at the same time it is “absorbing any kind of downward draft (on ),” this person said.
It’s a “peculiar kind of strategy” that the RBI is following which has left the market confused, Abheek Barua, chief economist at HDFC Bank said.
“The way I can rationalize it is by thinking in terms of FX reserves and that of rupee liquidity,” Barua said.
RBI’s forex market intervention has several implications beyond the dollar/rupee rate.
Buying dollars flowing into the local market boost India’s forex reserves and add to the rupee liquidity in the banking system. Selling dollars does the reverse.
India’s FX reserves have climbed to a more-than-four-month high of $604 billion, data released last Friday showed.
Banking system liquidity, which was in a large deficit in November, has moved to a surplus in December.
The RBI reinforcing its “low volatility regime” for the rupee and the currency’s overvaluation could also be reasons for the simultaneous buying and selling of the dollar, the treasury official at the private bank said.
According to the RBI’s latest monthly bulletin, the rupee was overvalued by about 5% against a basket of 40 currencies.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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