Rupee Reaches Highest Level Against Dollar in 2 Months

The Indian rupee on Thursday reached its strongest level against the dollar in over two months. In early trading, the rupee touched 94.27 per dollar, showing significant strengthening in a single day.

According to Bloomberg, on Thursday the rupee strengthened by about 0.74% against the dollar, reaching 94.2712. However, later this strength slightly decreased to about 0.5%. Now, the 94-rupee level is considered quite significant against the dollar.

Experts say that if the dollar-rupee exchange rate falls below 94 and stays there, exporters may increase their hedging. In such a situation, the rupee could strengthen further to reach 92.50 per dollar. Therefore, in the coming days, the market will keep an eye on the 94 level.

A major reason for the rupee's strength is considered to be the dollar sales by the Reserve Bank of India and the large inflow of foreign exchange reserves into the country. A few months ago, the RBI launched the Foreign Currency Non-Resident (Bank) or FCNR(B) deposit scheme to raise foreign currency. By August 31, the RBI had raised a total of 136.37 billion dollars in foreign currency, with the largest share coming from deposits by overseas Indians.

According to data, 127.2 billion dollars came from FCNR(B) deposits. Additionally, 5.26 billion dollars came from foreign currency borrowings and 3.89 billion dollars from external commercial borrowings. Initially, it was estimated that only 50-60 billion dollars would come from this scheme, later increased to 80 billion dollars, but the actual amount was much higher.

The rupee was suffering due to tensions in West Asia, high crude oil prices, and a decline in foreign exchange reserves. At such a time, the RBI facilitated raising foreign currency through banks and other channels to increase dollar availability in the country and support the rupee.

The RBI adopted a strategy to promote FCNR(B) deposits to raise foreign currency from NRIs. This is a fixed-term deposit in which NRIs can deposit their foreign earnings in foreign currency in India. The special feature of this account is that both the principal and the interest earned are returned in foreign currency, so NRIs do not have to bear the risk of rupee fluctuations.

According to Kotak Securities FX analyst Anindya Banerjee, the rupee is currently benefiting from three things. First, a large amount of foreign currency has come through the RBI’s scheme, giving the RBI greater capacity to manage the rupee. Second, strong GDP figures of India have increased market confidence in the economy. Third, there is sufficient money in the banking system, which is supporting economic activities.

Under this RBI scheme, the facility to accept new deposits in FCNR(B) was closed on August 31, about a month earlier than scheduled. This means the facility received a better response than expected. However, the foreign currency swap facility with the RBI under this scheme will continue until September 11, while the facility related to external commercial borrowings and Overseas Finance Corporation will remain open until December 31.

According to CareEdge Ratings, the large inflow of funds under this scheme has increased the availability of money in the banking system, which will provide some relief to banks in raising funding in the coming period.