MUMBAI: The Indian rupee sank to a six-week low against the U.S. dollar on Monday as interest rate differentials between the U.S. and India narrowed, while forward premiums hit their lowest in three months.
The rupee closed at 82.2950 to the dollar, down 0.16% from 82.1625 in the previous session. The rupee had lost 0.4% last week, weighed by a rise in the dollar index.
Asian currencies, barring the yuan, fell on Monday.
The dollar, supported by safe-haven flows, hit its highest level in a month versus its major peers.
Indian rupee likely to struggle at open on weak Asia peers
The U.S. dollar has seen a break out from its long consolidating level and the interest rate differentials between India and the United States is narrowing, said Ritika Chhabra, quant macro srategist at Prabhudas Lilladher.
The narrowing rate differentials disincentivise carry trade, putting pressure on the rupee, Chhabra added.
Carry reflects the interest rate differentials between two currencies.
Chhabra said the chances of the rupee depreciating further were limited, and that if it falls below 82.50, the Reserve Bank of India will intervene, given the cushion available on forex reserves.
India’s foreign exchange reserves rose for a second consecutive week to hit an over 11-month high of $595.98 billion in the week ended May 5.
The rupee was also hurt on Monday by dollar outflows, two traders said.
Meanwhile, the one-year implied USD/INR yield dropped to 2.04% due to the rise in U.S. yields and as India’s retail inflation eased to a 19-month low of 4.7% in April.
Local bond yields were down for most of Monday’s session, as the lower-than-expected retail inflation print cemented bets that the RBI is unlikely to raise rates further in the current tightening cycle.
When the forward premiums fall, exporters avoid hedging, which puts further pressure on the rupee, Chhabra added.
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