Indian rupee extends rise but falters past 95/USD on importer hedging, outflows

MUMBAI: The Indian rupee rose for a third consecutive session on Wednesday to hit a more than one-month peak as the central bank followed up tough regulatory measures with hawkish commentary.

However, the gains were capped below the 95 per dollar mark as dollar demand linked to importer hedging and portfolio outflows persisted. The rupee climbed to a peak of 94.77 in early trading before settling 0.1% higher at 95.15.

“A durable turnaround in the currency will also require negative global triggers to subside. The latest announcements may not fully quell speculation over further policy action,” DBS said in a note.

“Should depreciation pressures intensify again, markets are likely to price a higher probability of a front-loaded and more aggressive rate-hike cycle.”

Reserve Bank of India Governor Sanjay Malhotra has defended India’s recent forex curbs as an effort to discourage speculative bets and said the central bank is ready to take additional steps to ensure orderly rupee movement.

He added that while monetary policy is not typically deployed to address financial stability concerns, the two cannot be entirely separated.

Traders interpreted the remarks as a signal of limited tolerance to further rupee weakness.

The South Asian currency had declined over 7% year-to-date before fresh measures over the weekend and has risen 2% this week.

Rupee swap markets are currently pricing in nearly 100 bps of rate hikes over the next 12 months.

Indian importers continue to lock in future dollar purchase rates to protect against the rupee weakening, despite the banks charging more following the central bank’s steps.

Investors await US consumer inflation data, due later in the day, for cues on the future path of interest rates in the world’s largest economy. The dollar index was last at 102.2.