Mumbai: India’s central bank seems to have made few interventions in the forex market lately to help prevent imported inflation from spiralling in a Covid-ravaged economy, thus allowing the rupee to climb an unusual 4% against the US dollar in less than five weeks.

The lack of active Reserve Bank of India (RBI) intervention has surprised many forex investors and dealers who had anticipated robust central bank measures to help retain India’s export competitiveness. But Mint Road appears to have prioritised price stability at home — at least for the moment.

“In the backdrop of rising commodity prices, any depreciation in the INR’s value would further feed into imported inflation,” said Anand Bagri, head of domestic markets at RBL Bank. “India remains a net importing country and the prevailing market conditions warrant a gradual appreciation in the domestic currency.”

To be sure, the rupee mirrored other emerging market currencies over the past week, with the dollar declining against a basket of such monetary units.

The rupee is expected to extend its winning streak the next few sessions and may touch the levels of 71.90-72 in the short term, dealers said. Likely overseas fund flows should help the rupee advance against the dollar.

It gained 0.21% Friday to close at 72.44, extending the three-day winning run, Bloomberg data compiled by ETIG showed. The rupee is the best performing Asian currency in May, appreciating 2.05%, compared with a 1.32% decline in April.

“Regulatory intervention will be strong only when Brent breaks crucial levels weighing on India’s fiscal math,” said Kunal Sodhani, associate VP – global trading center at Shinhan Bank India. “Equity inflows are likely to retain the rupee’s strengthening bias but within a limit, beyond which it would trigger a rush among exporters seeking currency covers.”

Foreign portfolio investors this calendar year net bought ₹45,843 crore worth of local securities, with a lion’s share of that flowing into equities, data from the National Securities Depository showed.

However, if the rupee continues to gain, it may weaken the external sector balance sheet as India may lose export competitiveness at a time when the Chinese yuan hit a three-year high.

New Delhi is seeking to enhance its export competitiveness while focusing on import substitution.

Price Stability on Mind, RBI Limits Rupee Interventions

“The central bank is fully aware of the changing inflation dynamics amid the rising global commodity prices,” said Anindya Banerjee, currency analyst at Kotak Securities. “A vanilla intervention strategy could well add to price rises. However, the rupee rise needs to stop somewhere without which India stands to lose export competitiveness.”

Brent Crude prices have soared more than 11% in FY22, with India meeting more than three-fourths of domestic consumption through offshore shipments.

Similarly, metal prices globally have skyrocketed. Copper prices have spiked more than 16% in FY22.

“Consumer price index (CPI) inflation remains benign for major advanced economies. In a few emerging markets, however, it persists above targets on account of firming global food and commodity prices,” the central bank governor said in a speech on May 5. “The inflation trajectory over the rest of the year will be shaped by the Covid-19 infections and the impact of localised containment measures on supply chains and logistics.”

The Monetary Policy Committee (MPC), in its last meeting on April 7, retained the growth forecast at 10.5% for FY22. The inflation forecast was slightly raised, but within the 2 to 6% targeted band.

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