The Indian rupee staged a recovery on Thursday, closing at 89.98 against the US dollar, a day after it had breached the psychologically significant 90 mark. The domestic currency managed to halt a six-session declining streak, thanks to dollar sales by foreign banks and anticipation of fresh capital inflows.
Intraday Volatility and Key Drivers
During the trading session, the rupee experienced significant volatility, hitting an intraday low of 90.42 before reversing course to end higher. Analysts pointed to dollar sales from foreign banks and selling interest in the non-deliverable forwards (NDF) market as the primary catalysts for the turnaround. This intervention helped the currency pare its losses, providing some temporary relief.
Underlying Pressures on the Currency
Despite the day's recovery, the rupee remains under substantial pressure. It continues to languish at the bottom of the Asian currency pack this year. Several structural factors are contributing to its weakness:
- A widening trade deficit.
- Subdued foreign investment flows.
- Stalled trade talks between India and the United States.
These elements have collectively slowed foreign capital inflows into the country. Market participants believe the Reserve Bank of India (RBI) is tolerating a weaker exchange rate as inflows remain muted, using its reserves judiciously to manage volatility rather than defend a specific level.
Market Focus Shifts to RBI and Future Outlook
All eyes are now on the RBI's monetary policy committee decision scheduled for Friday. Currency traders expect the central bank's stance on interest rates and its commentary on inflation and growth to significantly influence near-term market sentiment.
In the immediate future, downward pressure on the rupee is expected to persist. The currency's fortunes in the coming year, however, could see a positive shift. A key factor for a sustained reversal would be concrete progress in international trade negotiations, which could boost investor confidence and attract long-term capital flows back to India.
