Will US Dollar Appreciation against Indian Rupee Continue?
The US dollar has appreciated by over 1.5% in comparison to Indian rupee since 7 April 2021 when the Reserve Bank of India (RBI), at its meeting, had announced that It would continue to make available additional liquidity of around Rs1 lakh per quarter during the current financial year for purchasing bonds through open market operations. The main objective of RBI was to assure the bond investors that it would not let the 10-year Indian government bond yield go up sharply causing volatility in the financial markets. The yield has gone down from 6.13% to 6.03% after RBI made public its decision of providing additional liquidity for bond purchases. 
 
What Led RBI To Make Such Decision 
 
In fact, RBI did not want any disruptions in the financial markets as a consequence of volatility that may be caused due to constant rise in the 10-year Indian government bond yield, as it could have created problems for the government which is planning to borrow a whopping around Rs12 lakh crore during the current financial year to fund its fiscal deficit. Any further rise in the bond yield may create problems not only for the Indian government but also for the Indian economy which is trying to recover amidst likely lock-downs in the wake of a dreadful second wave of COVID infections.
 
Will RBI Sell Dollars in the Spot Market To Check Its Appreciation against Indian Rupee 
 
It appears that RBI may not be able to sell US dollars in a decisive manner in the spot market as it used to do earlier, in the wake of fear of the squeezing of liquidity from the financial system because the selling of US dollars will suck out liquidity from the financial system that may lead to rise in the bond yield, which RBI may not prefer. The way the US dollar has constantly maintained its strength against the Indian rupee during the past three days makes this point very clear that RBI has not intervened decisively in the spot market by selling dollars in order to check its appreciation against Indian rupee as used to be done by it in the past.
 
Rising US Bond Yields May Be Problematic for RBI 
 
The yield on the 10-year US treasury that has gone up sharply to around 1.66% from 0.90% in December 2020 in the wake of inflation expectations that may be on account of likely fast economic recovery in the US, may be problematic for RBI. Rising yields in the US may force the foreign institutional investors (FIIs) to sell bonds and equities in the Indian market, creating further pressure on the Indian rupee, making it quite difficult for RBI to maintain a balance between checking Indian government bond yield and appreciation of the US dollar against the Indian rupee. 
 
Will US Dollar Continue To Get Stronger 
 
RBI is presently sandwiched between two hard options, one is to keep the yield on the 10-year Indian government bond under check by making available adequate liquidity in the financial system and the other is to intervene in the forex market by selling dollars in the spot market in order to check constant depreciation of Indian rupee against US dollar. The first option may have precedence over the second option in the present scenario, in view of the urgency to check the bond yield in order to enable the government to borrow funds from the market without any disruptions. 
 
(Mahesh Natani is a financial consultant, based in Indore, MP. Views expressed are personal.)
 
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    COMMENTS

    niranjansar

    4 weeks ago

    In my opinion the INR is going to gain strength.

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