INR Holds Tight as RBI Defends Amid Oil Shock

Key Moments

Commerzbank Sees INR Under Pressure from Oil and Geopolitics

Commerzbank strategists Charlie Lay and Moses Lim highlight that the Indian Rupee has come under significant strain from the conflict in the Middle East and higher Oil prices, even as the Reserve Bank of India prioritizes currency stability. The bank notes that USD/INR is likely to remain in a supported 92-95 range in the near term.

They observe that RBI has kept its policy rate steady at 5.25% and is using FX market intervention to limit excessive moves in the exchange rate.

Performance of the Rupee and Policy Rate Outlook

The analysts point out that the Rupee has been particularly affected by the oil shock:

“INR has borne the brunt of the oil shock. It is down 3.4% vs USD since the start of the Iran war and down nearly 5% year-to-date. RBI’s near-term focus is to smooth out excessive FX volatility.”

On the interest rate front, they expect no immediate change:

“RBI is expected to leave the policy rate unchanged at 5.25% in the near term, opting for flexibility amid elevated global uncertainties. USD-INR could continue to remain well-supported in the near term, between the 92-95 range.”

Trading Range, Record High, and Reserve Position

Commerzbank notes that USD/INR recently pushed to new highs before settling back into a narrower band:

“USD/INR climbed to a record high of just above 95.20 in late March. It traded between the 92-95 range since RBI’s measures. FX reserves are still at a healthy level of just over USD700bn as of 17 April, around 11 months of import cover. We look for consolidation in USD/INR in the near term with RBI intervention to contain the upside.”

RBI’s Targeted Measures to Curb Speculative Pressure

To reinforce the Rupee and limit arbitrage-driven flows, RBI Governor Sanjay Malhotra has rolled out a series of steps aimed at reducing speculative positioning and cross-market plays.

“RBI Governor Sanjay Malhotra announced several measures to support the INR by limiting the arbitrage trades. First, it capped the net open position in INR of dealer banks to USD100mn per day. This limits large short INR positions.”

The authorities have also tightened rules in the non-deliverable forward segment and on hedging practices:

“Second, it barred domestic banks from offering INR NDF contracts to non-resident Indians (NRI) and related parties. Third, it prohibited the rebooking of canceled forward contracts. RBI allowed deliverable forward contracts to be offered for hedging purposes. This reduced banks’ ability to short INR in the onshore market while taking a long position in the offshore NDF market to capture the spread.”

Commerzbank concludes that with robust FX reserves and active intervention, the RBI is likely to keep USD/INR in a consolidative phase, aiming to cap further upside in the pair.