The central bank’s move to directly supply dollar swaps to oil marketing companies halted the rupee march toward 70 a dollar mark.
Despite globally the dollar staying strong, the Indian currency on Thursday appreciated 225 paise to close at 66.55 per dollar on Thursday, logging its biggest single-day gain in percentage terms in 26 years.
The dollar index as measured against six major currencies was trading at 81.92 as compared with 81.43 levels a day ago.
On Wednesday, the Reserve Bank of India (RBI) launched a special forex swap window for three public sector oil marketing companies IOC, HPCL and BPCL. The announcement that came after market hours said a designated bank will cater to the daily dollar demand of the three oil marketing companies.
The measure helped to scoop out huge dollar demand from the spot foreign exchange market and divert the central bank’s resources to genuine demand directly.
The decision came after the Indian currency broke three psychological levels in three trading sessions since Monday to close at an all-time low of 68.80 per dollar on Wednesday.
However, economists are of the view that there are some technical issues that need to be looked at.
The cost of funds under the special window are seen higher as compared with other alternatives. Plus, oil marketing companies will have to face the risk of a depreciating rupee in future when the swap tenor ends.
“RBI needs to give a commitment that unless markets conditions improve, they will roll over the swaps. There is no clarity right now,” said Abheek Barua, chief economist at HDFC Bank.
RBI had said that the tenor for the currency swap would be fixed in nature. The central bank did not specify any time period for which this facility will continue.
“The sustainability of this measure will be closely watched as the central bank had taken a similar measure in 2008, which provided a short-lived relief to the rupee,” said Abhishek Goenka, founder & CEO, India Forex Advisors.
This does not end rupee’s woes permanently as more headwinds lie in store for the currency.
“Overall weakness in rupee is expected to prevail ahead of the release of India’s GDP and fiscal deficit numbers tomorrow,” said Jayant Manglik, president- retail distribution, Religare Securities.