In a dramatic turnaround, the rupee staged its strongest comeback in nearly two years. The currency gained about 1.5 per cent from its all-time low hit on Monday. This comes despite a deep crash in Indian stocks, which extended to Wednesday.

Advertisment

The significant rise in the rupee was propelled by the Reserve Bank of India's aggressive intervention. Reports show the central bank sold about 5 billion dollars via state-owned banks to stabilise the currency. The RBI's action was a direct reaction to the currency's recent turmoil.

The rupee crashed to reach a record low of 87.95 versus the US dollar on Monday, sending shockwaves through the market. The RBI's action triggered a sharp reversal, creating a domino effect that boosted the currency's recovery. However, the RBI burning through its forex reserves to support the rupee is raising some concerns.

While India's forex reserves are still healthy at about 631 billion dollars, the 10-month worth of import cover has fallen over 70 billion dollars since a record high of around 705 billion dollars in September last year. India's forex war chest is well above the average of about 300 billion dollars between 1998 and 2025.

Advertisment

Rupee recovers amid stock market chaos

Still, the risks are of more foreign outflows amid an escalating trade war hurting the country's import cover. What is also worrying is the deep sell-off in Indian stocks, with benchmark stock indices extending their massive losses for the sixth straight session.

The Sensex crashed over 700 points to fall below the 76,000 points mark. The broader Nifty index also was in the red. The selloff has already erased over 9 trillion rupees in investor wealth. This was prompted by the withdrawal of foreign institutional investors and increasing global tensions.

Advertisment

The decision by US President Donald Trump to impose a 25 per cent tax on steel and aluminium imports, together with threats of retaliatory tariffs, caused significant disruption in global markets. The turmoil in Indian stocks comes despite a pullback in global markets.

Asian and European stocks showed glimpses of a reversal to gains, suggesting traders are starting to feel numb on the trade war headlines. Wall Street futures, though, pointed to a mixed open, similar to Tuesday's close.

The comments from Federal Reserve's Chief Jerome Powell that the central bank is in no rush to cut rates weigh on sentiment. Fed chief's remarks also showed inflation concerns from the ongoing trade war. So, ahead of key US inflation data, investors remained on the sidelines.

(With the inputs from the agencies)