Indian rupee faces rout over acute shortage of dollar

Mumbai: An acute dollar shortage, spawned by uncertainties around the US debt ceiling and concerns over further rate increases in the world’s biggest economy, caused the rupee to lose its entire gains for the calendar year early Friday before the central bank reportedly stepped in to stem the local monetary unit’s rout.The dollar crunch, reflected by a key markets gauge, exacerbated pressure on the rupee, which registered its weakest performance in nine weeks. It slid to 82.80 intraday before settling at 82.67. The rupee, which had gained as much as 2% versus the US dollar in 2023 so far, has lost more than 0.6% in a week.

“Overall, there has been a dollar shortage. On Thursday, the cash-tom (cash-tomorrow) rate was at 0.10 points, which clearly indicated the dollar shortage,” said Anil Kumar Bhansali, head of treasury, Finrex Treasury Advisors. “Apart from the dollar index moving up, that was a reason for the move (weakness) in the rupee.”

Interventions by the Reserve Bank of India (RBI) helped the domestic currency recover some ground, traders said. The central bank’s interventions have also helped ease some of the dollar shortage in the system, they added.

“The cash-tom had moved sharply, which created the perception that there is a dollar shortage. A global dollar shortage is expected because of the US debt ceiling issue,” Anindya Banerjee, VP, Currency Derivatives, Kotak Securities, said.

US Debt Ceiling Talks
The US Congress is currently negotiating the suspension or increase of a debt ceiling limit, failing which the country’s treasury would fall short of funds.

“Once the debt ceiling fiasco is over, over the next couple of weeks, the dollar shortage will be taken care of. With the USD/INR at the upper end of the eight-month range, we can now see the RBI selling dollars which would increase the supply of dollars in the system,” he said.

Banerjee estimated that the central bank may have sold around $1 billion on Friday itself to prevent excessive volatility in the rupee.

Prior to the latest bout of volatility in the rupee, the central bank had been purchasing dollars and building up its foreign exchange reserves amid firm overseas inflows into Indian equities.

From $588.78 billion in the week ended April 28, the RBI’s forex reserves climbed to $599.53 billion in the week ended May 12, latest data showed. “Dollar shortages happen either as dollar supply comes down or if RBI absorbs dollars. There is a global dollar demand right now,” Bhansali said.

Plunging Premia
A recent plunge in the dollar-rupee forward premia has added to the pressure on the rupee by reducing the ‘carry’ from Indian assets, and lowering the incentive to sell dollars, traders said.

“The drop in USD/INR near forward premiums is in line with the decrease in overnight cash swap rates, which is attributed to rising US treasury yields and falling Indian treasury yields. This scenario is making Indian assets less attractive for carry traders,” CR Forex Advisors MD Amit Pabari said.