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19.10.2022 11:34 PM
INRUSD: Rupee falls to new lows (pair liquidity under threat)

The Indian rupee showed a new level of decline against the US dollar on Wednesday, as the rise in US Treasury yields caused the US currency to strengthen.

INRUSD: Rupee falls to new lows (pair liquidity under threat)

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The pair fell to a record low of 82.7750 against the dollar compared to 82.36 in the previous session.

Traders actively trading the rupee note that as soon as the Reserve Bank of India (RBI) moved away from the level of 82.40, which it defended, an absolute panic buying of the dollar began. Now they are more pessimistic and believe that if the RBI does not intervene again, no level will be untouchable.

It should be noted that the strong demand for dollars from two public sector companies contributed to the rupee's fall to a record low. A bad agenda threatening crop failures is not conducive to faith in the rupee.

Now experts are confident that the RBI will have to resume buying bonds on the open market in order to manage the liquidity of the banking system, which is likely to slide into deficit over the next two months anyway.

This week, the liquidity deficit of the Indian banking system has already amounted to 100 billion Indian rupees (1.21 billion US dollars), while an increase in the outflow of funds associated with tax payments is likely.

We should also expect a seasonal increase in currency leakage over the next few months, usual for the end of the year, which will lead to the withdrawal of about 0.5 trillion rupees (6.07 billion US dollars) per month from circulation within the segment. The liquidity of the rupee risks turning into a deficit over the next few months, even if the depletion of foreign exchange reserves stops, which is unlikely.

Thus, the RBI's foreign exchange reserves have already decreased by about 16% this year, to $532.9 billion as of October 7, due to changes in valuation and central bank interventions aimed at curbing the rapid fall of the rupee.

According to market analysts, the RBI will need to decide how to maintain money market rates at the level of directive rates. Of course, buying bonds on the open market will help to achieve temporary relief by injecting liquidity and preventing a larger sell-off in the bond markets. But the long-term perspective is still questionable.

Like most central banks in the world, the RBI conducted open market operations during the COVID-19 pandemic and stopped them in October last year.

The decision on an appropriate liquidity surplus or deficit in the system will actually depend on several factors, including the position of monetary policy, the need to support further credit growth, the skewed liquidity of the banking system and the stability of the currency.

Other tools available to the central bank, such as lowering the banks' cash reserve ratio and using currency swaps, may put further pressure on the rupee. It is already obvious that the rupee is in a difficult position. This is a clear signal for traders on this pair, but also on other emerging markets.

Egor Danilov,
Analytical expert of InstaForex
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