Indian rupee anchored by weak dollar, restricted by levels that attract dollar buying

MUMBAI: The Indian rupee is expected to draw support from a softer dollar at the open on Tuesday, though its advance is likely to run into increased dollar buying by importers following a recent central bank-driven rally.

The 1-month non-deliverable forward indicated the rupee will trade largely flat versus the US dollar, having settled at 89.65 on Monday.

The rupee mounted a decisive recovery from its all-time low of 91.0750 hit last Tuesday, a move traders largely attribute to aggressive, carefully timed central bank intervention that maximised near-term price impact and arrested the weakening cycle the currency had slipped into.

The intervention forced a reassessment of positioning by corporates and speculators.

With the currency now trading markedly higher, the rally is increasingly being viewed by bankers and FX advisors as an opportunity for importers to increase hedges.

Evidence of such demand was visible in Monday’s session, and bankers expect this behaviour to persist, potentially limiting upside on the rupee in the near term.

“Once you have printed 91 and then you are back to 89.50 in quick time, it’s obvious the importers will come in fast,” said an FX salesperson at a private sector bank.

“It takes at least a few sessions for the market to absorb a move of this kind.”

The rupee is expected to take comfort at the open from a modest uptick in Asian peers and a pullback in the dollar index toward the 98 handle.

The dollar index fell about 0.3% on Monday and extended its decline in Asian trade, weighed down by upbeat risk appetite and expectations of further rate cuts by the Federal Reserve.

Adding to the pressure on the dollar, threats of intervention by Japanese authorities to curb the yen’s slide lent support to the Japanese currency.