Central bank hand contains Indian rupee's fall, shrinks dollar-rupee forward premiums
The Indian rupee fell against the dollar due to importer hedging, foreign outflows, and central bank intervention. The RBI's dollar-selling prevented steeper losses amid persistent pressure from weak capital flows.
- RBI's dollar-selling interventions and swap operations.
- Factors driving the rupee's continued depreciation.
- India's macroeconomic challenges from global energy volatility.
MUMBAI: The Indian rupee and dollar-rupee forward premiums fell on Tuesday, driven by opposing forces of importer hedging, foreign portfolio outflows and likely central bank intervention across FX market segments.
The rupee ended at 95.2650 per dollar, down 0.3% from its close in the previous session.
Traders said that the losses would have been steeper had it not been for the Reserve Bank of India’s dollar-selling interventions, which have continued in almost every session since the rupee hit a record low of 96.96 per dollar in mid-May.
The central bank has conducted these interventions alongside dollar-rupee buy/sell swaps to manage rupee liquidity and the impact on its foreign exchange reserves.
Dollar-rupee forward premiums fell on Tuesday as a result of such swaps, with the 1-year implied yield down 12 basis points at 3.03%. Forward premiums reflect the cost of hedging against rupee weakness.
Despite the interventions, traders reckon the pressure on the rupee will persist in the near term as capital flows remain weak and uncertainty over the Middle East conflict keeps oil prices volatile.
Oil prices fell more than 1% on Tuesday, paring the previous session’s sharp gains, after U.S. President Donald Trump said talks with Iran were ongoing, running counter to a report that Tehran had suspended indirect negotiations with Washington to end hostilities.
The war-sparked disruption of global energy supplies has clouded India’s macroeconomic outlook, leaving the RBI in a policy bind over potentially higher inflation and slower growth as it tries to contain the rupee’s persistent decline.
Economists at J.P. Morgan, like a majority of those polled by Reuters, expect the RBI to keep the key policy rate unchanged at 5.25% at its meeting onFriday.
“Given the recent weakness in the currency, the RBI is likely to reiterate the “separability” principle under the inflation-targeting regime: Policy rates are used to manage growth-inflation dynamics, while FX volatility is addressed through FX reserves and other regulatory measures,” J.P. Morgan said.
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