The Indian rupee closed slightly weaker against the US dollar on Wednesday, December 24, as domestic corporate demand for the greenback and the maturity of certain derivative positions overshadowed positive momentum from other Asian currencies.
Local Flows Outweigh Regional Strength
The domestic currency settled at 89.7850 per U.S. dollar, marking a decline of approximately 0.1% for the session. While most Asian peers edged higher, traders noted that local flow dynamics continued to dictate the rupee's movement. The currency has, however, recovered from the record-low levels it touched last week.
A key factor pressuring the rupee was the maturity of positions in the non-deliverable forward (NDF) market. "The maturity of positions in the NDF market also spurred dollar-buy bids at the daily reference rate," explained a trader at a Mumbai-based bank.
RBI's Forex Swap Impacts Forward Premiums
While spot market activity was contained, significant movement was seen in forward premiums. The Reserve Bank of India (RBI) announced it will conduct a 3-year, $10 billion forex swap next month. This move triggered a sharp decline in dollar-rupee forward premiums.
The announcement led to a fall of nearly 15 paisa in the 1-month forward premium and a drop of over 50 paisa in the 3-year forward premium. This swap is part of the central bank's broader plan to inject $32 billion of liquidity into the banking system over the coming month.
Liquidity Measures to Stabilise Markets
Traders expect these liquidity measures to ensure a sustained decline in government bond yields. Reflecting this sentiment, India's 10-year benchmark bond yield fell by 8 basis points to 6.55% on Wednesday.
Analysts highlighted the dual benefit of the RBI's actions. Sachin Sawrikar, Managing Partner at Artha Bharat Investment Managers, noted in a commentary, "Open market bond purchases provide direct support to the banking system, while the forex swap helps manage rupee liquidity without creating unintended cues on currency policy." He added, "Together, these measures stabilise money markets, moderate volatility, and ensure smooth transmission of monetary policy."
In global markets, the US dollar was on track for its worst annual performance in more than two decades as investors bet on further Federal Reserve rate cuts in the coming year. Many global markets, including India's, were scheduled to remain closed on Thursday for the Christmas holiday.
