Indian Rupee Under Pressure Despite Central Bank Support
The Indian rupee is set to begin Friday's trading session on a weaker footing, hovering dangerously close to its historic low. Market indicators suggest the currency will open in the range of 89.40-89.42 against the U.S. dollar, following Thursday's closing at 89.3050. This positions the rupee within striking distance of last week's all-time low of 89.49, raising concerns among traders and investors.
RBI's Defensive Moves Prove Insufficient
The Reserve Bank of India launched substantial intervention efforts earlier this week aiming to break the cycle of depreciation that threatened to accelerate after last week's breakdown. The central bank's aggressive moves temporarily boosted the rupee back through the 89 handle, providing brief relief to market participants.
However, this recovery proved short-lived as persistent dollar demand from importers, cautious hedging by exporters, and underwhelming portfolio flows gradually eroded most of the gains achieved through RBI's support. The currency's continued weakness despite the central bank's intervention is particularly notable given the current softness in the U.S. dollar globally.
Global Factors and Corporate Flows Create Perfect Storm
The dollar index is heading for its worst weekly performance in four months as confidence grows that the Federal Reserve will implement a third consecutive rate cut in December. Normally, such dollar weakness would provide support to emerging market currencies like the rupee.
According to the CME's FedWatch tool, fed funds futures now indicate an 86% probability of a 25-basis point rate cut on December 10, a significant increase from approximately 40% just one week ago.
A currency trader from a private sector bank highlighted the underlying issue: "You don't get this kind of slow relentless push higher on dollar/rupee unless corporate flows are skewed and there is nothing to offset it." The trader added that speculators currently lack macroeconomic triggers to drive USD/INR significantly higher.
Key Market Indicators and Foreign Investment Flows
Current market metrics paint a clear picture of the rupee's challenges:
- One-month non-deliverable rupee forward at 89.52
- Onshore one-month forward premium at 14 paise
- Dollar index trading at 99.62
- Brent crude futures holding steady at $63.3 per barrel
- Ten-year U.S. note yield at 4.01%
Foreign investment activity shows mixed signals, with data from NSDL revealing that foreign investors purchased a net $562.4 million worth of Indian shares on November 26. However, the same data indicates that foreign investors sold a net $26.1 million worth of Indian bonds on the same date, reflecting continued caution in debt markets.
The combination of strong importer hedging, hesitant exporter participation, and moderate foreign flows continues to create an environment where the rupee remains vulnerable to further depreciation, leaving market participants watching closely for any signs of sustained RBI support or shifts in global dollar sentiment.
