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Three indicators in India’s foreign exchange markets pointed to foreigners, potentially passive funds, buying the country’s sovereign debt on Thursday, a day ahead of the South Asian nation’s inclusion into the JPMorgan emerging market debt index.
Firstly, the rupee rose to as high as 83.4750 per dollar, up 0.12% on the day, despite the weakness in Asian peers and a jump in U.S. Treasury yields.
Additionally, the dollar/rupee “daily fix” was dealt at a discount to the reference rate that the Reserve Bank of India will release in the afternoon. This indicates a higher supply of dollars at the reference rate relative to demand.
Finally, the very-near dollar/rupee swap points rose as well, signalling dollar inflows, traders said.
“Index (JPMorgan related) flows are there, mostly foreign banks on offer,” a forex salesperson at a large private sector bank said.
Traders expected passive inflows related to the inclusion on Thursday and Friday, even though overall foreign buying in bonds fully accessible to foreigners crossed $10 billion since the inclusion announcement in September.
“It definitely looks like the flows are hitting. The foreign banks are on the offer (on dollar/rupee) and are paying” the very near-term swaps, a senior currency trader at a mid-sized private sector bank said.
The foreign banks who are known to have large foreign custodial clients are selling dollars, and “it is reasonable to assume” it is tied to the inclusion, more so with “the dollar bid in Asia”, a treasury official said.
The rupee, however, is not expected to appreciate significantly amid the inflows.
“Expect the RBI to prudently manage the flows,” Mandar Pitale, head of treasury at SBM Bank India, said. “Don’t think there will be any runaway appreciation.. on the rupee.. RBI is likely to be present on both sides.”
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