Market Analysis by Abhishek Goenka: Why is rupee not depreciating till now despite USD strength?

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The Rupee has been one of the better-performing currencies amid the extreme panic and turmoil we have witnessed in global markets. On previous occasions when we have seen such panic, we have seen three-month Rupee vols spike to 15-20%.

So far the vols have not hit 10%. The RBI has averted a run on the currency despite one month offshore points trading above onshore by 80p at one point.

The previous low of 74.50 has held well so far. The central bank deserves credit for the way it has managed the currency so far.

It is one of the few central banks globally that has resisted the pressure to cut rates. By keeping the carry elevated i.e. supporting forward premiums, it has kept the cost of going long USD INR high. Elsewhere, we have seen a basis weaken due to USD funding pressure.

It was also one of the first central banks to preemptively address the Dollar liquidity problem by conducting a Sell-Buy swap. It has intervened verbally, through futures and likely even in the offshore market which is unprecedented.

Currencies of economies that have cut rates have exhibited more volatility and have depreciated more viciously.

Tailwinds from crude have also helped but in past instances when we have seen extreme risk aversion, we have had phases in which crude tumbles and Rupee to depreciate.

When the Rupee was in a range, the RBI was bolstering its Reserves. Our Reserve cover for imports and short term external debt is more comfortable than ever before.

The RBI has ensured that adequate Rupee liquidity is available in the banking system by way of LTROs. It has replenished the Rupee liquidity that has been taken out through FX intervention.

Off late, we have seen a massive sell-off in corporate bonds on account of redemption pressure. Spreads have widened even for good credits and maybe that is one area that the RBI may now look to address.

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