The Indian rupee fell to a fresh low of 92.64 per dollar on Wednesday, breaching the psychologically crucial 92.50 per dollar mark on the back of sustained importer demand for dollar, exacerbated by thin dollar liquidity ahead of bank holiday on Thursday. Concerns over a widening trade deficit continued to weigh on the domestic unit, said dealers.
The central bank was seen protecting the 92.50/$ mark which was breached today. The Indian unit fell 0.28 per cent against the dollar on Wednesday.
“At the fag end of the day the RBI allowed 92.50 to be breached… For now, the war continues and higher oil prices continue to ensure a higher CAD for India till the prices fall to $ 80 and below,” said Anil Kumar Bhansali, executive director and head of treasury, Finrex Treasury Advisors.
The rupee had settled at 92.38 per dollar on Tuesday. It has depreciated by 7.74 per cent against the dollar in the current financial year, whereas, it has witnessed 2.98 per cent weakness in the current calendar year. In March, the local currency has depreciated by 1.79 per cent.
“The Indian rupee plunged to a fresh record low as a break below the 92.50 per dollar level sparked a sharp sell-off, exacerbated by thin dollar liquidity ahead of the bank holiday,” said Dilip Parmar, Senior Research Analyst, HDFC Securities
“Despite a backdrop of strong risk appetite and softer crude prices, the currency faced aggressive importer dollar demand. With geopolitical tensions stoking fears of a wider trade deficit, year-end demand remains robust,” Parmar said added.
Brent crude oil prices fell to $101 per barrel during the day before strengthening slightly to 103.20 per barrel by the end of the Indian trading hours, against the previous day’s $102.80 per barrel. Meanwhile, dollar index also remained unchanged at 99.57, against the previous day’s 99.78. It measures the strength of the greenback against a basket of six major currencies.
Market participants said that traders now eye the upcoming policy decision by the Federal Reserve scheduled after market hours on Wednesday. Markets widely expect the Fed to keep interest rates unchanged in the 3.50 per cent-3.75 per cent range, with focus shifting to guidance from Jerome Powell on the policy outlook amid rising oil prices and mixed signals from the labour market.
“The US Federal reserve decision and commentary will determine the direction of dollar index, after it has remained softer for two days,” said a dealer at a state-owned bank. “The RBI allowed rupee to breach 92.50 per dollar, but we expect intervention on Friday after rupee’s movement in NDF on Thursday,” he added.
Despite the pressure on the currency and the rise in crude oil prices, government bonds remained relatively stable. The yield on the benchmark 10-year government bond settled at 6.73 per cent, against the previous close of 6.72 per cent.
On the other hand, surplus liquidity in the banking system fell below Rs. 1 trillion primarily due to advance tax outflows, which are estimated to drain around Rs. 2 trillion from the banking system, with additional pressure expected from GST payments that typically suck out another Rs. 1 trillion.
The net liquidity of the banking system was in a surplus of Rs. 81,963 crore on Tuesday, latest data by the RBI showed.
Experts said that while foreign exchange intervention by the Reserve Bank of India is also at play, its impact on liquidity remains contained as the central bank is actively sterilising these operations through bond purchases and USD/INR swaps. As a result, the current liquidity deficit is largely being driven by tax-related outflows rather than FX actions.
The banking system liquidity is likely to slip into a temporary deficit for a few days before government spending towards the end of the month restores liquidity. Although such transient tightness would typically warrant short-term measures like variable rate repos, market participants expect the RBI to ensure system liquidity remains adequate, around 1 per cent of net demand and time liabilities, to retain flexibility for currency intervention amid heightened external uncertainties.
