Rupee Appreciates Sharply Against US Dollar From Early Record Low, Thanks To RBI's Liquidity Measures

The Indian rupee appreciated strongly after RBI kept the repo rate unchanged while announcing fresh measures for liquidity into the system. At the interbank forex market, the rupee attracted more inflows to ease below 84.5 levels against the US dollar. The rupee touched the day's best mark of 84.48 per dollar, compared to the previous closing price of 84.689 per dollar.

Before the RBI policy, in the early trade of Friday, the rupee hit a fresh record low of 84.831 against the dollar. However, after the policy outcomes, the rupee accelerated to shine against the dollar.

Some of the key measures announced by the central bank for boosting the rupee are:

1. RBI has allowed banks to raise fresh FCNR(B) deposits of 1 year to less than 3 years maturity at rates not exceeding ARR plus 400 bps and deposits with maturity between 3 to 5 years at rates not exceeding ARR plus 500 bps. This relaxation will be available till March 31, 2025.

2. Also, to expand the reach of the FX-Retail platform and enhance user experience, it is proposed to facilitate the linking of the FX-Retail platform with Bharat Connect (earlier known as Bharat Bill Payment System) operated by the NPCI Bharat Connect.

RBI said, that going forward, the scope will be expanded to cover other FX transactions including the sale of US dollars against the Rupee and other categories of users. Users will continue to have the option to directly access the FX-Retail platform, as hitherto, and transact under the existing mechanism. Instructions to banks on the operational aspects of the pilot will be issued separately.

3. RBI also proposed to develop a benchmark based on the secured money markets (both basket repo and TREP) - the Secured Overnight Rupee Rate (SORR). Financial Benchmarks India Limited (FBIL) is being requested to take the proposal forward. The other recommendations of the Committee are under consideration.

From April - November 2024, the Indian rupee depreciated by at least 1.3% against the US dollar, which RBI governor Shaktikanta Das pointed out was due to pressure from strengthening US Dollar and selling pressure by foreign portfolio investors in October and November.

He added, "Nevertheless, both the depreciation of the INR and its volatility was less as compared to its EME peers, reflecting India's strong macroeconomic fundamentals and improvement in external sector outlook."

On the above-mentioned development, Bhavik Thakkar, CEO of Abans Investment Managers said, "While RBI policy today on Repo rate status quo and CRR cut of 50 bps has been on expected lines, RBI has increased the ceiling for offering FCNR (b) deposits (where NRIs can hold foreign currency deposits in India) by around 150 bps. This suggest that RBI is thinking more strengthening of $ against ₹. In the last few weeks, appreciation in $ has resulted in the weakening of ₹ (and also other major currencies) wherein RBI intervenes by selling $ and buying ₹ to maintain demand for ₹. This results in lower forex reserves. Today's step of increasing the ceiling for FNCR deposits (which means higher interest rates for foreign currency deposits) makes us think that RBI expects continuous actions particularly from USA which can strengthen the $."

While Sandeep Bagla, CEO, of TRUST Mutual Fund said, there is pressure on Rupee from sustained FPI selling in equities. Any rate cuts would weaken the Rupee as well. RBI is likely to reduce rates in February policy, once inflation starts easing again. 2 out of 6 MPC members voted for a rate cut, which shows that the possibility of a rate cut in February is very high"

RBI kept policy repo rate unchanged for the eleventh time in a row on Friday. That being said, the policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.50%. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.