INR: Rupee Rallies Most in Over 2 Years Amid Heavy RBI Intervention

The Indian rupee has rallied by its most in over two years amid suspected heavy intervention by the RBI. USD/INR is 0.75% lower at typing but had dropped ~1% lower compared to Monday’s close earlier in the session. According to traders who spoke to Reuters, the RBI sold dollars before the open of the local spot market via state-run banks, which then persisted after the market opened. The rupee's sharp rise likely prompted traders to exit long positions on USD/INR, exacerbating the currency’s gains. The swing lower in spot has been accompanied by a spike higher in INR vols, with 1-month USD/INR implied vols currently nearing on multi-year highs (see chart below).

• Concerns about a potential trade war, outflows from domestic equities and policy easing by the RBI have all been familiar headwinds for the rupee this year. USD/INR had been trading around 2.7% higher on the year at the start of the week, but those gains have since moderated to just 1.2% owing to the sharp sell-off over the past two sessions. Still, INR remains among the weakest of the major EM currencies on a YTD basis (in terms of spot gains vs. USD) with the RBI seemingly more tolerant of a weaker rupee. Nevertheless, Governor Malhotra said last week the RBI’s currency strategy remains consistent in its aim to maintain stability without hurting market efficiency.

Figure 1: USD/INR 1-month implied volatility