The Indian rupee ended Tuesday's trading session at 90.19 against the US dollar, marking a modest decline from the previous day's closing level of 90.16. The currency faced downward pressure alongside benchmark government bonds after Bloomberg Index Services announced it would not include Indian bonds in its global aggregate gauge at this time.

Currency Performance and RBI Intervention

The rupee traded within a narrow 10-paisa band during Tuesday's session, with the currency moving between 90.20 and 90.30 against the dollar. Market participants reported that the Reserve Bank of India actively defended the currency, preventing it from weakening beyond the 90.30 level.

Bond Market Impact

The bond market experienced significant volatility following the Bloomberg index announcement. The yield on 10-year benchmark government bonds closed at 6.63%, representing a notable increase from earlier levels. The most dramatic movement occurred around 10 am when yields spiked approximately 10 basis points immediately after news broke that Indian bonds had failed to secure inclusion in Bloomberg's Global Aggregate Index.

Market Drivers and Analysis

According to Anil Bhansali, head of treasury at Finrex Treasury Advisors, multiple factors contributed to the rupee's decline. "The main reasons for the fall was the imposition of a 25% tariff by the US on countries dealing with Iran. The buy/sell swap was also a reason for the fall in rupee as more rupees are introduced into the system," Bhansali explained.

The combination of external pressures from US trade policies and domestic liquidity conditions created a challenging environment for the Indian currency. The buy/sell swap operations mentioned by Bhansali refer to monetary policy tools that can increase rupee supply in the financial system, potentially weighing on the currency's value.

Index Exclusion Implications

The decision by Bloomberg Index Services to exclude Indian bonds from its global aggregate gauge represents a setback for India's efforts to attract foreign investment into its debt markets. Such index inclusions typically lead to increased foreign portfolio investment as global funds tracking these indices are required to purchase the included securities.

Reserve Bank of India Governor Sanjay Malhotra has provided clarity on the central bank's exchange rate policy, emphasizing that there are no predetermined target levels for the Indian rupee, including the widely discussed 90-91 range against the US dollar. Speaking exclusively to NDTV Profit, Malhotra outlined the RBI's intervention philosophy and India's macroeconomic position amid ongoing global uncertainties.

Exchange Rate Policy Framework

The RBI Governor categorically stated that the central bank does not pursue or target any specific price level or band for the rupee. Instead, the institution's approach centers on maintaining financial stability and ensuring orderly currency movements. Malhotra explained that RBI interventions occur exclusively to address undue or excessive volatility, regardless of whether the currency faces sharp depreciation or appreciation pressures.

India's Macroeconomic Fundamentals

Malhotra highlighted several key indicators that demonstrate India's economic resilience. The country maintains foreign exchange reserves of approximately $690 billion (₹57,50,000 crores), providing substantial buffer against external shocks. Additionally, India continues to experience high growth rates while maintaining relatively low inflation levels and a manageable current account deficit.

"On the whole, on the external front, we are very comfortable," Malhotra stated, while acknowledging that currency movements naturally involve fluctuations rather than linear progression.

Historical Rupee Performance Analysis

The Governor provided context for recent rupee movements by examining longer-term trends. Over extended periods, the rupee has depreciated by approximately 3.00% annually on average, which Malhotra described as natural given India's typically higher inflation rates compared to advanced economies.

The current calendar year has seen approximately 5.00% rupee depreciation compared to 2.50% in the previous year, resulting in a combined average of around 3.50% over the two-year period.

Economic Outlook and Assessment

Malhotra characterized the current phase of India's economy as a "Goldilocks" phase, indicating an optimal balance between economic growth and stability. This assessment reflects the country's ability to maintain robust economic performance while managing inflationary pressures and external sector challenges effectively.

The Governor reiterated that RBI's intervention strategy remains unchanged, with no intention to defend specific exchange rate levels such as 90 or 91 rupees per dollar. The central bank's actions will continue focusing exclusively on preventing abnormal or excessive currency movements in either direction, allowing market forces to determine the rupee's fundamental value.

India's exchange rate policy framework has maintained consistency over recent years, balancing market-determined pricing with regulatory oversight to ensure financial stability. This approach has enabled the country to navigate various global economic challenges while preserving macroeconomic stability and supporting sustained economic growth.

Source: https://www.ndtvprofit.com/markets/no-red-line-for-the-rupee-at-90-or-91-says-rbi-governor-profit-exclusive