The Indian rupee concluded trading on Thursday at 91.96 against the US dollar, marking a decline of 18 paise from its previous close of 91.78. This movement came after the currency slipped to a record low near the psychologically significant 92 level before recovering marginally. The recovery was attributed to dollar sales executed by public sector banks on behalf of the Reserve Bank of India (RBI), which intervened to cap further losses in the foreign exchange market.
Factors Driving Rupee Weakness
The rupee's depreciation was influenced by multiple factors, including a strengthening US dollar. The dollar index edged up approximately 0.12% to around 96.27, adding pressure on the local currency. Additionally, strong dollar demand linked to derivative maturities and corporate hedging activities contributed to the downward trend. According to Jateen Trivedi of LKP Securities, the rupee traded flat to weak as markets remained cautious ahead of the Union Budget scheduled for February 1. He noted that elevated bullion prices have increased India's import bill, while continued foreign institutional investor (FII) selling in equities has added further pressure on the currency.
Impact on Financial Markets
The rupee's weakness spilled over into other financial segments, notably the government bond market. The RBI had previously undertaken measures to infuse liquidity to keep yields down, but dollar sales by the central bank ended up draining some of this liquidity. This created a complex scenario where efforts to stabilize the currency inadvertently affected bond market conditions. Moreover, expectations of further rupee depreciation weighed on the interest rate swap market, pushing short-term swap rates higher despite relatively benign domestic macroeconomic indicators.
RBI's Role and Market Sentiment
Traders highlighted that RBI intervention in the foreign exchange market was crucial in preventing losses beyond the 92 mark, which is viewed as a critical psychological threshold. However, the intervention's dual effect on liquidity underscores the challenges faced by policymakers in balancing currency stability with broader financial market conditions. As the Union Budget approaches, market participants are closely monitoring fiscal policies and economic forecasts, which could influence the rupee's trajectory in the coming weeks. The interplay between global dollar strength, domestic economic factors, and regulatory actions continues to shape the currency's performance, with analysts advising vigilance amid ongoing volatility.
