MUMBAI: The Indian rupee weakened on Tuesday as dollar bids from foreign banks, likely on behalf of custodial clients, and a softer Chinese yuan outweighed positive cues from broad weakness in the greenback.
The rupee closed at 85.6350 against the U.S. dollar, down about 0.3% on the day.
Asian currencies were mixed on the day while the offshore Chinese yuan dipped lower after China cut key benchmark lending rates and corporate seasonal demand for dollars remained high.
A fall in local equities also weighed on the rupee, with traders pointing to dollar demand from foreign banks, likely spurred by mild outflows from local stocks.
Benchmark Indian equity indexes closed down by about 1% each on the day while the yield on the country’s benchmark 10-year bond dipped.
The rupee should stabilize in the 84-86 band “aligning with its historical tendency to regain equilibrium after sharp currency movements,” analyst at DBS said in a Tuesday note.
The local currency had declined to its all-time low of 87.95 in February but has since clawed back losses despite spurts of volatility trigged by shifts in U.S. trade policies and the India-Pakistan conflict.
The currency’s 1-month implied volatility, a gauge of future expectations, has eased to about 5% after rising above 7% last week when the conflict flared up.
Traders reckon that in the near-term currency markets will remain focused on developments arising from trade deal negotiations.
The dollar meanwhile, appeared under pressure amid uncertainty over trade policy, concerns about the U.S. fiscal outlook, and fading confidence in the long-held exceptionalism of U.S. assets.
Speculators are net short the dollar to the tune of $17.32 billion, close to the most bearish position on the buck since July 2023, according to CFTC data. On the day, the dollar index was down nearly 0.3% at 100.1.
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