Rupee gains marginally on likely RBI intervention despite stronger dollar

The Indian rupee outperformed most Asian currencies on Wednesday, supported by likely intervention from the Reserve Bank of India (RBI), even as the US dollar strengthened amid expectations of possible Federal Reserve rate hikes.

The rupee closed at 94.6650 per US dollar, slightly stronger than Tuesday’s close of 94.7350. After weakening in early trading, the currency recovered as state-owned banks reportedly sold dollars, likely acting on behalf of the RBI to stabilise the market.

In contrast, most Asian currencies declined, with the South Korean won leading regional losses by falling nearly 1%. The pressure on Asian currencies persisted despite a drop in Brent crude oil prices to $75.60 per barrel, their lowest level since late February.

Market sentiment remained cautious as investors continued to price in the possibility of tighter US monetary policy. The US dollar index rose 0.2% to 101.6, staying close to a 13-month high.

Analysts at ING noted that although they do not expect a prolonged bullish cycle for the dollar, its short-term momentum remains strong.

In India, expectations of higher US interest rates, combined with RBI Governor Sanjay Malhotra’s comments that discussions about rate hikes are still premature, led to a decline in dollar-rupee forward premiums. The one-year dollar-rupee forward implied yield fell by 9 basis points to 2.83%, while the one-year overnight index swap rate dropped to 5.74%, its lowest level since March 12.

Malhotra stated that the RBI is closely monitoring whether rising oil prices create broader inflationary pressures before deciding on any changes to interest rates.

He also reiterated that the central bank does not target a specific exchange rate for the rupee and intervenes only to prevent excessive volatility in the foreign exchange market.