Rupee Volatility and Recent Levels
The Indian Rupee has experienced increased volatility, surpassing the 83 level in the last month, a level not seen since August, after a three-month period of relative stability within a 40 paise range. Despite briefly touching 82.90, the Rupee’s volatility has been influenced by the RBI’s deviation from the established range.
Liquidity Mismatch and Banking System
A liquidity mismatch between the US Dollar and Rupee has disrupted the Rupee’s tracking of fundamentals and the weakening Dollar index. The banking liquidity deficit has surged to 2.67 trillion rupees as of December 25, the highest since April 1, 2016, primarily due to outflows related to advanced tax payments and GST.
RBI’s Response to Liquidity Deficit
The RBI has implemented measures to address the liquidity deficit, including buying Dollars in exchange for Rupees to infuse liquidity. The central bank has also utilized Variable Rate Repo (VRR) auctions to incentivize banks and financial institutions to secure funds at lower interest rates, thereby injecting liquidity into the financial system.
Outlook on Liquidity and Rupee
As the quarter ends, liquidity pressures within the banking system typically ease, with expectations of reduced liquidity concerns in the new year. Banks have been raising funds through Certificate of Deposits (CDs) and increasing deposit rates to tackle liquidity shortages. The RBI’s aggressive pursuit of VRR may not be necessary as banks address their deficit concerns.
Rupee’s Future Prospects
The USDINR exchange rate currently fluctuates between 83.00 and 83.40, with challenges in maintaining levels below 83. Resilient fundamentals and robust inflows in November and December suggest potential for Rupee adjustment towards the 83 level. A breach of this support could lead to a 50-paise shift, taking the Rupee towards 82.50. The RBI is expected to adopt a more flexible approach in the foreign exchange market, allowing for a wider range of 20-25 paise compared to the previous range of 5 to 10 paise.