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Why the rupee hit 2-year high post RBI policy

Rupee gained about 0.60 per cent or 38 paisa to close at 63.70, the level last seen on July 23 two years ago. RBI is believed to have intervened to curb the local unit’s sharp rise, dealers said.

, ET Bureau|
Aug 02, 2017, 09.25 PM IST
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MUMBAI: The rupee hit a two-year high after exporters sold their foreign-currency receivables on expectations that positive real interest rates would induce further buying of Indian debt assets by overseas funds, hardening the local currency in the bargain.

The rupee gained about 0.60 per cent or 38 paisa to close at 63.70, the level last seen on July 23 two years ago.

The Reserve Bank is believed to have intervened to curb the local unit’s sharp rise, dealers said. An engineering conglomerate and an IT company were seen selling dollars heavily.

“A lot corporate (dollar) selling has emerged triggering a rally in the currency market,” said Ashish Vaidya, head of trading and ALM at DBS Bank. “They were earlier waiting for a crucial level to be breached before they cover their receivables.”

“We may see continued interest in the India’s debt investment with a reasonably higher real interest rate wooing overseas investors,” he said.

A real interest rate is the return savers or investors obtain after adjusting for inflation. The real rate is the nominal rate minus inflation.

During the day, the rupee hit a high of 63.60 to the dollar after the Reserve Bank announced its bi-monthly policy maintaining its stance as ‘neutral’, which limits further rate cut possibilities.

“The currency market was a bit apprehensive of the RBI”s stance,” said Anindya Banerjee, analyst at Kotak Securities. “With a ‘neutral’ stance, RBI is unlikely to cut the policy rate further this fiscal year. This will help keep the real interest rate higher, a key trigger for foreign portfolio investors betting big on domestic debt securities.”

“The rupee would continue to rise in coming weeks,” he said.

There are different calculations to derive the real rate. The gap between the yield on one-year Treasury Bills - short-term sovereign debt paper - and one-year projected retail inflation is the real rate, said some experts.

ET Intelligence Group data show that India offers one of the highest real interest rates among 10 global regions since November 2001, when it recorded a 5.02% real rate. Among the regions included in the analysis are the US, the EU, and the emerging markets.

“Today’s sharp move came after lacklustre trading sessions that lasted two/three months,” said K N Dey, managing partner, United Financial Consultants, a Mumbai-based forex firm. “Jittery investors, who were unhedged earlier, sold dollars to hedge their portfolios. Some foreign banks too seem to have sold
dollars as their clients may have taken fresh positions.”

Since the first week of April, the rupee has been range bound with no sharp intra-day swings. It traded in the range of 64-65 to the dollar until Tuesday.

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