The Reserve Bank of India headquarters in Mumbai. The RBI turned a net seller of dollars for the first time in a year in August, data showed this month, boosting optimism governor Raghuram Rajan will deploy the war chest of foreign exchange reserves he built over two years to stem volatility.

Bloomberg
Mumbai

The confirmation that Indian central bank Governor Raghuram Rajan stepped in to stabilise the rupee in August has only emboldened investors betting on the nation’s bonds.
The Reserve Bank of India turned a net seller of dollars for the first time in a year in August, data showed this month, boosting optimism Rajan will deploy the war chest of foreign- exchange reserves he built over two years to stem volatility. A gauge of expected rupee price swings against the dollar has fallen over the past six months even as the US Federal Reserve prepared to raise interest rates and China devalued the yuan, while that for every other Asian currency rose.
“The RBI still sees currency stability as the foremost priority,” said Viraj Patel, a London-based currency strategist at ING Groep. “If we saw another episode of excess volatility, then we think the RBI will undoubtedly intervene again.”
The rupee has climbed 0.7% in October to head for its biggest two-month advance since March 2014, buoyed by a surge in foreign holdings of local bonds to a record after India opened up its debt market.
Nomura Holdings predicts the current-account deficit to narrow to a decade-low 0.9% of gross domestic product in the year to March 2016 as commodity import prices slump, while the government aims to cut the budget gap to an eight-year low.
India will use its reserves to stem rupee swings, Rajan said in August after China’s yuan depreciation triggered a sell- off of emerging-market assets.
The currency’s one-month implied volatility dropped to 6.26% on October 19, the lowest since August 12, signalling a smaller potential for losses. It climbed to a 15-month high of 9.93% on August 25.
The rupee jumped 1.4% in September, the most since January and the best performance among 24 developing-nation exchange rates tracked by Bloomberg. The outperformance was driven by optimism around India’s relatively low exposure to China’s economic slowdown and a drop in oil costs.
Futures contracts show a 32% chance of an increase in rates by the Fed this year, down from 41% at the start of this month.
India’s central bank sold $1.6bn in the spot market in August, the most since January 2014, official data show.
The nation’s foreign-exchange reserves stood at $353.07bn as of October 9, compared with a record $355.5bn in June.
“One thing is clear, the RBI doesn’t like volatility,” said Harihar Krishnamoorthy, the Mumbai-based treasurer at the local unit of South African lender FirstRand. “A confluence of factors, from bets of US rate hikes getting pushed back to higher foreign-holding limits for local bonds, have added to the rupee’s stability.”
Krishnamoorthy sees the rupee staying in a 64-65 a dollar range by the end of December. RBI officials, including Rajan, have often said the monetary authority intervenes in the foreign-exchange market to limit volatility and has no target levels.
Overseas holdings of local-currency bonds increased Rs148.5bn ($2.3bn) this month through October 19 to a record Rs3.55tn as India relaxed curbs on global funds’ investment in sovereign bonds and allowed them to buy notes issued by state governments for the first time. India’s trade shortfall shrank to a four-month low of $10.5bn in September, led by a 55% plunge in oil imports.
Local 10-year sovereign bonds yield 7.58%, the highest among major Asian markets after Indonesia.
DBS Bank Ltd says the RBI is likely to have continued intervening last month as the rupee sank to a two-year low of 66.8650 a dollar on September 7. The currency has since climbed 2.7% to 65.13 a dollar in Mumbai yesterday.
“While it is far from certain whether this bout of stability will sustain, the authorities are likely to return to limit the rupee’s relative appreciation in order to preserve trade competitiveness, build foreign reserves and keep it in sync with other regional action,” DBS Bank economists including Singapore-based Radhika Rao wrote in an October 14 report.
“The central bank’s presence is likely to be more pronounced during bouts of currency appreciation than the other way around.”