The Indian rupee staged a dramatic recovery on Wednesday, December 17, appreciating sharply against the US dollar after the Reserve Bank of India (RBI) stepped in to sell the American currency and arrest a prolonged slide.
RBI's Aggressive Intervention Halts Rupee's Fall
After slipping past the psychologically crucial 91 mark in the previous session, the rupee made a smart comeback, rising as much as 1% to 90.0963 per US dollar. This marked its most significant single-day gain since May 23. The rebound was triggered by reports that the central bank aggressively sold dollars in the market to provide support.
VRC Reddy, treasury head at Karur Vysya Bank, told news agencies that at the 91 level, the rupee appeared overly depreciated. He confirmed that the RBI had sold dollars around that mark. "The central bank had stayed relatively light on FX management in December (until now)," Reddy noted.
Unwinding Speculative Positions
The RBI's action followed a sharp slide in the Indian rupee to record lows in recent weeks, which had sparked debate over the central bank's apparent reluctance to intervene. Traders indicated that the intervention likely gained momentum after the RBI bought $5 billion via a foreign-exchange swap on Tuesday.
This move on Wednesday mirrored the RBI’s tactics in October and November, when it stepped in aggressively on three separate occasions to counter persistent one-way movements in the currency. On each of those occasions, the central bank sold dollars heavily in both the spot and non-deliverable forward (NDF) markets, leading to sharp intraday reversals.
Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, told Bloomberg that the central bank’s action would cause an unwinding of speculative positions for the time being. Bankers had begun flagging the risk of such heavy-handed intervention earlier in the week.
Rupee Was Asia's Worst Performer Before Rebound
Before Wednesday's sharp bounce, the Indian rupee was down almost 2% in the month of December, making it the worst-performing major currency in Asia. The decline was driven by sustained foreign fund outflows and a deadlock in the India-US trade deal, which collectively dented market sentiment.
The strain on the rupee has been exacerbated by significant capital flight. Global funds have pulled approximately $18 billion from local equities this year. These withdrawals, combined with the threat of 50% US tariffs on some exports and firm import demand keeping dollar appetite elevated, had created significant downward pressure on the currency.
The RBI's decisive action on December 17 demonstrates its intent to curb excessive volatility and prevent disorderly market conditions, providing much-needed stability to the foreign exchange market.
