Indian Rupee Weakens Amid Concerns Over Sustained Relief Without Inflow Support

Indian Rupee Continues Downward Trend Amid Weaker Asian Peers and Importer Hedging

The Indian rupee extended its two-session decline on Thursday, pressured by weaker Asian peers and importer hedging after a central bank-led relief rally. As of 12:45 p.m. IST, the rupee was trading at 95.7550 per U.S. dollar, a decrease from its previous settlement of 95.7050 on Wednesday. The currency has been meandering in a narrow range throughout the session and is currently near its lowest level of the day.

The rupee has shown signs of recovery after the Reserve Bank of India's intervention in spot and forward markets helped it rebound from a lifetime low of 96.96 hit around mid-May. Expectations of measures to boost inflows and support the currency have further aided the recovery. The RBI's intervention has provided breathing room for the rupee and dragged down FX premiums, a currency trader at a private sector bank noted.

The RBI is expected to keep interest rates on hold on Friday, according to most economists. However, traders are more evenly split on whether the central bank will opt for a hike or stay unchanged. A rate hike is expected to lift the rupee, but traders doubt how long the relief will last. If Friday's RBI policy does not deliver steps to support the currency, expect renewed pressure, especially now that the rupee has corrected and forward premiums have come off.

Read also: India Seeks Resolution of ONGC Dues in Talks with Venezuela

Meanwhile, most Asian currencies weakened and regional equities slipped. Renewed U.S.-Iran hostilities rattled risk assets, while mixed signals on de-escalation kept investors wary. Lower forward premiums reduce the cost for importers to hedge future dollar payments, while disincentivising exporters from hedging. This has contributed to the ongoing downward trend of the rupee.