Aug 25 (Reuters) - The Indian rupee's 1.2% surge on Monday, as the central bank unexpectedly broke with a recent pattern of intervening to maintain a 74.50-75.50 range, should pave the way for the INR to catch up with its emerging Asian peers.
India's rising coronavirus toll, expectations of a drastic slowing in the economy and a deteriorating fiscal position have all contributed to the rupee being one of the worst Asia ex-Japan performers in 2020.
Meanwhile, suspected intervention by the Reserve Bank of India, believed to be aimed at quelling volatility, has prevented the INR from appreciating despite buoyant global risk appetite and substantial foreign investor inflows. Estimates from ANZ analysts place RBI dollar purchases at $30 billion in the four months to July, according to a Bloomberg report.
The intervention also appears driven by a desire to build a buffer and improve INR competitiveness as India strives to become a manufacturing base .
Since early July the RBI's support level for USD/INR appeared to have moved down to 74.35-50, in line with broader dollar weakness, from 74.90-75.00 previously. The central bank's absence on Monday signals a lower tolerance threshold now, with India's foreign exchange reserves at record highs.
The immediate target for the USD/INR drop is 73.62-65, with rallies to 74.50-60 a selling opportunity.
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(Krishna Kumar is a Reuters market analyst. The views expressed are his own)
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