Indian rupee falls on-week as merchant, NDF-linked flows blunt dollar retreat

MUMBAI: The Indian rupee closed modestly higher on Friday but logged a weekly fall as dollar demand related to merchant flows, arbitrage trades and maturities in the non-deliverable forward market outweighed comfort from a broadly weaker U.S. dollar.

The Indian rupee declined nearly 1% on the week to close at 95.21 per dollar, slipping past the 95 per dollar level for the first time in three weeks.

Improved foreign portfolio inflows into government bonds and expectations of a balance of payments surplus for the year ending March 2027 has improved sentiment on the rupee, even though day-to-day flows continue to pinch the unit, traders and analysts said.

“USD/INR has been on a roller coaster ride even before the Iran conflict, driven by a combination of weak capital inflows and also rising foreign direct investment repatriation. Nonetheless, RBI’s FX measures have started to stabilise the Indian rupee,” MUFG said in a note.

The measures include incentives to draw inflows via dollar deposits and overseas borrowings.

India’s ICICI Bank is mulling its first dollar bond sale in nearly nine years, after peers HDFC Bank and Axis Bank used the central bank’s lower-cost hedging facility for foreign-currency issuance, Reuters reported earlier in the day.

During the week, dollar demand linked to maturing positions in the NDF market and large merchant payments pressured the rupee.

“It (USD/INR) is sticking to the trend of following the dollar higher but lagging on the way down,” a trader at a private bank said.

The dollar index was down 0.2% at 100.7 and on course for its biggest weekly loss in 12 weeks on Friday after a tepid U.S. jobs report cooled market expectations for a near-term Federal Reserve interest rate hike.

Markets are now pricing in about a 53% chance for a hike at the September meeting, according to LSEG data.