The Reserve Bank of India have stepped into the FX market with intervention so support the rupee.
Yesterday I reported on four consecutive days of INR weakness, the RBI acting to avoid a fifth today.
The rupee’s recent slide has been driven mainly by early-year importer hedging demand, compounded by a lack of strong foreign equity inflows. Market participants say these persistent structural flows have outweighed sporadic central-bank support, leaving the currency exposed to further downside pressure.
Sentiment has also been dented by a deterioration in the US–India trade backdrop. Over the weekend, Donald Trump warned that Washington could consider higher tariffs on India if New Delhi does not rein in purchases of Russian oil. Those comments have added a geopolitical risk premium to the rupee at a time when positioning remains extended.
The Reserve Bank of India has continued to play a stabilising role in recent sessions. After initially leaning against the currency’s move through the 90 level, the central bank appears to have reduced its presence as dollar demand persisted, reinforcing the view that officials are focused on managing volatility rather than defending a specific level.
There may be some near-term relief from global factors. The US dollar has softened from a recent four-week peak as investors turn their attention to upcoming US data for clues on the Federal Reserve’s policy path. Markets are currently pricing in around two Fed rate cuts this year, a backdrop that could help cap further rupee weakness at the margin. I'm reluctant to see too mkuch releif for the ruppe though. Absent a reversal in portfolio flows, an improvement in global risk appetite, or a clear positive trade-related catalyst, the rupee is likely to remain under pressure. Without such shifts, a test of fresh record lows cannot be ruled out ahead despite today's intervention efforts. I suspect we'll see further bouts of RBI 'smoothing'.
