By In a surprising turn of events, the Indian rupee fell on Thursday despite the broader positive performance of Asian currencies, which were buoyed by the increasing likelihood of the Federal Reserve cutting policy rates later this year. At 09:35 a.m. IST, the rupee was trading at 83.43 against the US dollar, a slight dip from its previous close at 83.37.
This decline in the rupee can be attributed to multiple factors, primarily the political uncertainty following a weaker-than-expected showing by Prime Minister Narendra Modi’s coalition in the recent national elections. The initial shock of the election results put the rupee under significant pressure. However, the RBI intervened, helping the currency to partially recover in the following session.
Despite the RBI’s efforts, traders expect the central bank to continue its intervention strategies to prevent any sharp declines in the rupee. Yet, the sustained outflows from Indian equities are likely to maintain pressure on the currency.
Over the past two trading sessions, foreign investors have sold more than $2 billion worth of Indian equities. This significant sell-off contrasts with the relatively stable performance of Indian equity indices, with the Sensex and Nifty50 both up by approximately 0.7% in early trading.
Anil Bhansali (the head of treasury at Finrex Treasury Advisors) noted that with the RBI’s firm stance, the rupee is expected to trade within a range of 83 to 83.50 for the time being. The intervention by the central bank has been crucial in stabilizing the currency amidst the volatile market conditions.
Meanwhile, forward premiums on the dollar-rupee pair have ticked higher. The 1-year implied yield increased by 2 basis points to 1.66%, influenced by a drop in US bond yields following economic data that bolstered hopes for two rate cuts by the Federal Reserve this year. The dollar index fell by 0.1% to 104.1, which contributed to the gains seen in most Asian currencies.
The currency market is closely watching the upcoming RBI monetary policy decision and the US non-farm payrolls report, both scheduled for Friday. These events are expected to provide further direction for the rupee. Investors are particularly interested in how the RBI will navigate the current economic landscape and address the challenges posed by political uncertainties and foreign investment outflows.
A foreign exchange trader at a private bank mentioned that the anticipation of central bank intervention to cap rupee weakness could lead to natural offers to sell dollars around the 83.50 mark. This sentiment reflects a broader expectation that the RBI will take necessary measures to stabilize the currency in the face of ongoing economic pressures.
The rupee’s decline amidst the gains of its Asian peers underscores the unique challenges faced by the Indian economy. While the central bank’s interventions have provided some respite, the continued outflow of foreign investments from the equity market remains a significant concern.
As the market looks ahead to the RBI’s policy decision and key US economic data, the rupee’s trajectory will be closely monitored by traders and investors alike. The next few days will be critical in determining whether the rupee can regain its footing or if further declines are on the horizon.
