The Reserve Bank of India (RBI) could step up its intervention in the forex markets by buying dollars to halt the rupee’s upward march amid higher portfolio inflows and a weaker greenback overseas.

The signs of intervention by India’s apex bank were in evidence on Thursday as Asia’s best-performing currency in this calendar year retreated from its six-month highs.

The domestic unit opened on a strong note at 82.82 against the previous close of 82.89 and shot to an intra-day peak of 82.73, the highest level seen since September.

One of the reasons behind the rupee’s appreciation was the global weakness of the dollar, which was reflected in the dollar index (DXY).

The DXY, which gauges the greenback’s strength against a basket of six currencies, declined to 103.15 from the last close of 103.37. At the time of writing this report, it had recovered from the low and was trading at 103.24.

Forex circles said the weakening of the dollar was on account of remarks by US Fed chair Jerome Powell in his testimony to lawmakers.

In a sign of a less hawkish stand, Powell said rate cuts could happen this year, once the Fed decision-makers were convinced that the war on inflation has been won.

European Central Bank president Christine Lagarde held views similar to Powell as it kept its main interest rate unchanged at 4 per cent on Thursday. “We are making good progress towards our inflation target and we are more confident as a result — but we are not sufficiently confident,” Lagarde said.

Robust FPI inflow into the debt markets is another major factor behind the rise of the rupee as India’s government securities are set for inclusion in JP Morgan’s Emerging Markets Index from June.

According to NSDL data, foreign investors have put Rs 45,572 crore into bonds in 2024, though they remain net sellers in equities to the tune of Rs 12,382 crore.
Observers say the rupee could appreciate more with inflows into debt only expected to increase in the coming months.

“While the RBI often intervenes in the market through state-run banks, we could see it resorting to dollar purchases if the rupee continues to rally. It will use the opportunity to build the country’s forex reserves,’’ an analyst said.

However, weak Asian and European markets and concerns over global economic slowdown may cap the sharp upside.

“USD-INR spot price is expected to trade in a range of Rs 82.50 to Rs 83,” he said.

Meanwhile, a Bloomberg report said the RBI has asked the country’s major oil refiners to explore the possibility of using the rupee as a payment option for 10 per cent of their purchases from West Asia from next year.

The move is aimed at bringing down the dependence on the dollar.

However, oil traders have opposed the proposal because of currency risk and conversion charges.