Analysis-Indian rupee’s return to near-record lows reflects RBI debate on intervention

By Gopika Gopakumar, Jaspreet Kalra and Nimesh Vora

MUMBAI, July 21 (Reuters) – The Indian rupee’s return to near-record lows is sowing confusion among investors and traders, who say the central bank’s limited interventions to strengthen it have left them struggling to gauge how much weakness policymakers can tolerate.

The rupee has ‌lost nearly 2% this month for the weakest performance among Asian peers, hovering near an all-time low and reversing a June recovery driven by lower oil ‌prices and India’s moves to lure dollar deposits and foreign debt inflows.

The markets’ uncertainty over the Reserve Bank of India’s intentions stems from a divergence of views in the bank over the extent of intervention ​needed to manage the currency, said three sources familiar with the central bank’s discussions.

“The RBI’s softer approach towards intervention has been difficult to understand,” said Vivek Rajpal, Asia macro strategist at JB Drax Honore.

Recent client inquiries on the rupee have centred on the central bank’s intervention strategy, he added.

The RBI’s approach to currency intervention shapes hedging and speculative activity in the foreign exchange market, where participants’ positions typically reflect perceived intervention thresholds, making clear policy crucial to limiting volatility.

India’s measures to beef up dollar deposits from its overseas diaspora and attract foreign ‌debt inflows drew more than $20 billion in about a month, ⁠brightening expectations of meeting a year-end forecast range of $40 billion to $60 billion.

Yet the surge in dollars has done little to halt the rupee’s decline, shifting investor focus back to the RBI’s response.

The central bank’s limited and intermittent intervention has surprised traders who expected stronger support after Governor ⁠Sanjay Malhotra said it would do “whatever is required” to ensure orderly currency moves, according to four senior bankers.

INTERNAL DIVIDE

Internally, RBI officials are divided over how aggressively the central bank should intervene to support the rupee, said the three sources, who spoke on condition of anonymity, as internal discussions are confidential.

Malhotra and his deputy Poonam Gupta, both drawn from outside the RBI, favour allowing the ​market ​to largely determine the level of the currency while stepping in mainly to curb excessive volatility, ​the sources said.

Both believe the currency should be allowed to adjust ‌to macroeconomic changes, in this case a higher oil import bill, they added.

The RBI did not respond to an email seeking comment.

The RBI has long said its interventions aim solely to restrain excessive volatility, but it has never publicly defined the term, allowing different approaches by successive leaders.

Under former Governor Shaktikanta Das and his then deputy, Michael Patra, the rupee traded in an unusually narrow range, with implied volatility at one point falling to its lowest in more than two decades.

The current leadership believes foreign exchange reserves should be conserved and views reserve adequacy more conservatively than headline figures suggest, one source said.

India’s foreign exchange reserves stand at $675.2 billion, though some analysts estimate useable reserves at roughly $460 ‌billion after adjusting for gold holdings and forward positions.

The current leaders’ view is at odds with that ​of some bank veterans involved in market operations, however.

They favour more regular and aggressive intervention to discourage ​one-way bets against the rupee and reinforce confidence in policy measures, the sources ​said.

NOT JUST OIL

This month, the rupee has lagged other regional oil-sensitive currencies such as the Indonesian rupiah, the Philippine peso and the Thai ‌baht.

That underperformance points to India-specific factors in play, said Michael Wan, ​senior currency analyst at MUFG Bank in Singapore.

The ​RBI has not been significantly selling dollars “beyond sporadic moves,” he said, adding, “If anything, the RBI has been probably” building up foreign exchange reserves.

The pressure on the rupee, absent decisive RBI intervention, is a “proximate symptom” of the underlying issue for the currency, Wan said.

In light of the rupee’s underperformance, two Singapore-based hedge fund ​portfolio managers focused on rates and currencies said they had reinstated ‌bearish rupee positions after the currency broke through levels they had expected the RBI to defend.

A recent Reuters FX positioning poll underscores deteriorating sentiment ​towards the rupee. Short positions picked up in the first 10 days of July after falling to an eight-month low in June.

(Reporting by Nimesh ​Vora, Gopika Gopakumar and Jaspreet Kalra in Mumbai; Editing by Ira Dugal and Clarence Fernandez)