Interbank Market News Scan: The Indian Rupee had been gaining strength against the US dollar over the last week.

All the chatter about BRICS countries creating an alternative reserve currency inspired me to take a closer look at the Indian rupee.  Also, the Indian population here in Atlanta gives me the impression that there is a vibrant and affluent community here.

The chart below appears to show a strengthening in the Indian rupee.

  27 February 202328 February 20231 March 20232 March 20233 March 2023
FX reported by Federal ReserveUSD/INR82.690082.570082.430082.410081.9800
FX Reported by OANDAUSD/INR     

While I tend to focus more on law and policy on my blog, sharing some insights on how brokers analyze spreads should be helpful.

According to 55Brokers, a provider of foreign exchange broker reviews, tight spreads can represent an urgency on the part of a broker to get a trade completed.  Depending on the trade strategy, tight spreads can minimize trader losses on price differences.  Technology is moving markets faster allowing brokers to offer tighter spreads.

Lastly, tighter spreads are a sign of greater liquidity, according to 55Brokers.  This means that capital is being attracted to the market.  Wider spreads may be an indication of either a less liquid market or that currencies are exhibiting volatility.

Data from OANDA appears to bear this out.  The bid on the USD/INR climbed from INR 74.9150 in January 2022 to INR 82.7266 in December 2022.  Spreads also tightened from INR 0.2500 in January 2022 to INR 0.0250 in December 2022.  As we shared earlier, tighter spreads are an indicator of greater liquidity, and in this case an indicator of greater demand, all things being equal, for the U.S. dollar.

December 202282.726682.75160.0250
November 202281.640781.66150.0208
October 202282.251182.32450.0734
September 202281.638181.65890.0208
August 202279.567479.70240.1350
July 202279.092079.34200.2500
June 202278.738078.87300.1350
May 202277.413377.54830.1350
April 202276.378176.51310.1351
March 202275.510075.64510.1351
February 202274.943075.19300.2500
January 202274.915075.16500.2500
Source: OANDA   

We should also keep in mind that during that time period the US dollar saw steady increases in interest rates, an increase that likely contributed to the dollars attractiveness.

It is no wonder that India intervened in its foreign exchange market for the purpose of protecting the rupee against a strengthening dollar.  According to The Hindustan Times, the Indian foreign reserves rose to USD 505.519 billion, but this rise occurred after foreign reserves had peaked at USD 645 billion.  Indian foreign reserves had been pegged at USD 633 billion in 2022.

In the grand scheme, the data I am looking at is more of a snapshot, but has me asking if India plans to do the practical thing and maintain good currency relations with the U.S. and the BRICS?

Alton Drew

8 March 2023

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