Traders Debate Whether RBI Will Loosen Rupee Grip on Yuan Moves

Apr 1, 2024 1:44 pm | News

Article content

(Bloomberg) — The recent yuan volatility has spilled over to the rupee, sparking speculation among traders that the Reserve Bank of India may face pressure into loosening its firm grip over the currency.

The rupee slid to a record closing on March 22, a day when the yuan fell to a four-month low. That caught Indian traders and analysts off guard as they had become accustomed to the currency trading within a tight range.

Article content

While the rupee’s movements against the dollar are closely monitored, authorities also pay attention to yuan due to India’s large trade deficit with China at about $100 billion. Allowing the Indian currency to weaken in line with the yuan may also be aimed at preserving the nation’s export competitiveness, particularly as Prime Minister Narendra Modi’s government aims to boost manufacturing.

“The thesis is that the RBI will not like a sharply stronger rupee versus the yuan from a competitiveness angle,” said Dhiraj Nim, economist and forex strategist at Australia and New Zealand Banking Group. “This means that if the PBOC allows the yuan to weaken substantially, the RBI may also prefer a competitively weaker rupee. The PBOC’s preference isn’t quite clear yet.”

The rupee’s one-month implied volatility against the dollar stood at 2.5% on Thursday, up from 1.68% in early March, which was the lowest in about two decades. Its sensitivity to the yuan has risen above 0.5%, the highest since January, based on a 10-day rolling beta, technicals show.

“What it tells us is that the RBI has embarked on a bit more tolerance for rupee volatility, and we think this continues,” said Parul Mittal Sinha, head of India financial markets at Standard Chartered Plc. “What we are looking out for is whether this tolerance is more toward rupee weakening than letting the rupee appreciate.”

Article content

To be clear, the RBI isn’t primarily influenced by the People’s Bank of China’s yuan policy. Its key objective has been to boost its foreign-exchange reserves to guard against a global risk-off event. Reserves have reached an all-time high of $643 billion as the central bank soaked up foreign flows entering the nation’s bonds and equities markets.

The “yuan is a current-account surplus currency, and so has certain innate buffer in the absence of geo-political shocks, whereas the rupee may be subject to energy, inflation volatility,” said Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank in Singapore. “The bigger picture remains that the RBI will judiciously contain excessive volatility, and not jump on bandwagons.”

Here are the key Asian economic data this week:

  • Monday, April 1: Japan Tankan Large Mfg Index, South Korea exports, S&P Global Mfg PMIs across Asia, Indonesia CPI
  • Tuesday, April 2: RBA minutes, South Korea CPI, Japan monetary base, Melbourne Institute inflation, HSBC India PMI
  • Wednesday, April 3: Jibun Bank Japan PMI, Caixin China PMI,
  • Thursday, April 4: New Zealand building permits, Australia building approvals
  • Friday, April 5: RBI policy decision, South Korea current account, Australia trade balance, Philippines CPI,  Indonesia forex reserves, Thailand CPI

—With assistance from Mary Nicola.

Share this article in your social network

feed from