Indian Rupee Hits Record Low Due to Arbitrage Pressure
The Indian Rupee reached a historic low in its closing value against the U.S. dollar, marking its eighth consecutive session of losses. As the rupee struggles, a widened gap between the non-deliverable forwards (NDF) market and the outright forwards market has added extra pressure.
Rupee Closes at 85.7525 Against the Dollar
On Thursday, the rupee closed at 85.7525 against the dollar, showing a slight decline of 0.1%. It hit an intraday low of 85.79 before recovering, likely due to intervention by the Reserve Bank of India (RBI), traders reported. State-run banks were observed offering dollars during the day, especially around the 85.78-85.79 mark, signaling RBI’s attempt to stabilize the currency.
RBI’s Intervention to Support the Rupee
This marks a continuation of the RBI’s strategy of intervening in the market to support the rupee. Last week, the RBI stepped in strongly when the rupee hit a record low of 85.8075.
Arbitrage Opportunities Weigh on the Rupee
Despite some gains in other Asian currencies, the rupee remained under pressure, primarily due to increased demand for dollars. Banks have been taking advantage of the arbitrage opportunities between the NDF and the onshore over-the-counter (OTC) markets, contributing to the rupee’s weakness. This led to a rise in dollar-rupee forward premiums, with the one-year implied yield reaching its highest level since October 2022.
Forward Premiums Retreat After RBI Action
Later in the session, forward premiums retreated after state-run banks, possibly acting on behalf of the RBI, conducted dollar-rupee buy/sell swaps. Over the past month, the RBI has supplemented its spot market interventions with these swaps to ensure rupee liquidity in the banking system and protect foreign exchange reserves.
Rupee’s Outlook in the Near Term
Looking ahead, the rupee is expected to trade in the range of 85.30 to 85.80, according to Amit Pabari, managing director of CR Forex, a foreign exchange advisory firm. Analysts predict that the Indian Rupee will continue to face challenges, as it grapples with both global dollar strength and concerns about India’s slowing economic growth.
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