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Record Local INR Close as RBI Favour Reserve Building

INDIA
  • CNY not the only EM currency to be suffering Wednesday - as Bloomberg note, the local close for USD/INR is the highest on record at 83.4337, with pressure on the currency persisting right into the close.
  • Local currency weakness comes despite intermittent reports of intervention to sell dollars in recent weeks - and seems to be taking the lead from the RBI's signalling of more comfort with two-way risk in the pair. Last week, Reuters cited trading sources in reporting the “surprising absence” of RBI intervention when the pair closed at a record high previously.
  • The apparent comfort with a weaker currency comes as the RBI favour the extensive building of FX reserves - evident in last week's headlines that the central bank will keep building reserves as it seeks to build larger buffers and recent strong inflows into local equity and debt markets give the RBI space to build such reserves.
  • RBI governor Das noted earlier this year that they're looking to insulate the economy from spillovers in global FX prices. The impact of this, with intervention only at the margins, is supressed volatility - USD/INR 6m implied vols hold close to cycle lows, having slipped below 3.00 points for the first time on record this year.
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