The Indian rupee was trading at 95.7550 per U.S. dollar as of 12:45 p.m. IST on Thursday, slightly down from its previous close of 95.7050. The currency has been fluctuating within a narrow range and is currently near its lowest level of the day, following a rally supported by the Reserve Bank of India's interventions in the forex market.
The rupee's recent recovery from a lifetime low of 96.96 in mid-May was aided by the RBI's actions in both spot and forward markets. These measures have provided temporary relief to the currency and contributed to a decline in foreign exchange premiums. However, market participants are cautious about the sustainability of this recovery in the absence of further measures to boost inflows.
A currency trader at a private sector bank noted that the RBI's interventions have offered some breathing room for the rupee, but warned that if the RBI's policy announcement on Friday does not include steps to support the currency, the rupee could face renewed pressure. This is particularly concerning now that the rupee has corrected and forward premiums have decreased.
“The RBI's activity has provided breathing room for the rupee and dragged down FX premiums.”
A currency trader at a private sector bank
Lower forward premiums are beneficial for importers as they reduce the cost of hedging future dollar payments. However, they also discourage exporters from hedging, which could impact the currency's stability. Economists largely expect the RBI to keep interest rates unchanged on Friday, though traders are divided on the likelihood of a rate hike.
While a rate hike could provide a temporary lift to the rupee, traders remain skeptical about the longevity of such relief. Meanwhile, broader market sentiment has been affected by the weakening of most Asian currencies and a dip in regional equities, driven by renewed U.S.-Iran tensions and mixed signals on de-escalation.
“If Friday's RBI policy does not deliver steps to support the currency, expect renewed pressure, especially now that the rupee has corrected and forward premiums have come off.”
A currency trader at a private sector bank
Background
The rupee's performance is crucial for India's economic stability, particularly in the context of global market volatility and geopolitical tensions. The RBI's interventions have so far helped stabilize the currency, but sustained recovery will likely require additional measures to attract foreign inflows and support the rupee.
Looking ahead, market participants will closely watch the RBI's policy announcement on Friday for any measures aimed at supporting the rupee. The outcome could significantly influence the currency's trajectory and market sentiment in the coming weeks.
