The Indian Rupee could not sustain a three session rally as a combination of profit taking and Central Bank intervention have balanced each other out. The Rupee was one of the worst performers versus the dollar after Ben Bernanke took the stage an announced – prematurely based on some of his colleagues – the end of QE. The government moved fast to stop the decline of the currency and positive deficit figures were released a day early to stop the bleeding. The tactic worked and the rupee went on to enjoy three sessions of gains.
The USD/INR is trading around 59.66/67 after touching the all time low of 60.76 in June 26th. Weak fundamentals and lack of reform pointed to a downwards trend that was accelerated by the US Federal Reserve’s comments about the tapering of its QE program. Contradicting statements tried to clarify what exactly was said versus what the market understood by other members of the Fed. The Rupee and emerging markets in general recovered some lost ground, but as the US Non Farm Payroll report approaches on Friday higher volatility around EM is expected.
Rumours are circulating the market that the Reserve Bank of India has phoned trading desk asking them to reduce their speculative positions on the INR. While not the most effective tool at the Central Bank’s disposal it is one that can prove effective in the short term. It might be the only option as the CB is not ready to sell dollars directly. The move is not sustainable in the mid term as foreign flows will dictate the price of the currency regardless of the wishes of the RBI.