The Indian rupee climbed on Thursday, 9 August, as traders shrugged off concerns about a renewed surge in central bank intervention to stem the local unit’s gains, betting that strong capital inflows would push it higher.

After market hours on 8 August, the Reserve Bank of India raised the ceiling on market stabilisation bonds (MSS) — used to absorb funds generated by its currency intervention — to Rs1.5 trillion ($37 billion) from Rs1.1 trillion.

Currently, the rupee is at 40.43/44 per dollar, moving up from the close of 40.5250/5350 on 8 August. It hit a nine-year high of 40.20 in late July.
“You don’t buy a gun and shoot the first thing,” said the chief dealer with a foreign bank. “The central bank is only getting the ammunition ready.”

The central bank has played an active role in the currency market, buying dollars through state-run banks in a bid to cap the rupee, which has gained about 9.5% this year, driven higher by strong capital inflows into the fast-growing economy.

But the central bank’s dollar purchases have fuelled money supply, fanning inflation, and the MSS bonds are used to suck out the excess funds pumped in through intervention. A higher ceiling on the bonds could mean more aggressive intervention in the future, analysts said.

Still, dealers continued to buy the local currency, in anticipation of overseas investment flows, brushing off concerns that the central bank would move decisively against the rupee in the near term. “There have been so many MSS hikes and nothing happened,” said a dealer with a corporate.

On 7 August, the finance ministry said companies that raise more than $20 million overseas would only be able to use the proceeds abroad. They will have to get central bank approval for raising funds up to $20 million for local use.