The Indian rupee slid to a record low against the U.S. dollar on Thursday, pressured by dollar demand arising from maturing non-deliverable forward positions and corporate hedging activity. Market participants pushed the currency down during the session before it settled at 91.9550 per dollar, registering a 0.2% decline from the previous close. At its weakest point in the trading day, the rupee reached 91.9850.
Traders and analysts noted that demand for dollars tied to the settlement of non-deliverable forwards - contracts that are settled in foreign exchange rather than by delivery of the underlying currency - along with corporate hedging flows, were the primary drivers of the move. Those dollar flows put sustained pressure on the rupee during the session.
Reports indicate the Reserve Bank of India likely intervened in the foreign exchange market to prevent the rupee from weakening beyond the psychologically significant 92 level against the dollar. Intervention in the FX market is aimed at limiting disorderly currency moves by supplying dollars or otherwise supporting the rupee, according to market convention.
The currency’s depreciation also had consequences for Indian government debt markets. The rupee’s weakness influenced government bond trading, creating a situation where the RBI’s attempts to inject liquidity into the banking system are being counterbalanced by its upstream actions in the foreign exchange market. In other words, liquidity support to banks is at odds with the central bank’s FX interventions, which can absorb domestic liquidity.
Market participants are watching how this dynamic - the need to manage currency volatility alongside domestic liquidity conditions - evolves in the near term. For now, the session closed with the rupee weaker on the day, having touched an intraday low of 91.9850 and finishing at 91.9550 per dollar.
Key points
- The rupee hit a record low and closed at 91.9550 per dollar, down 0.2% on the day.
- Dollar demand was driven by maturing non-deliverable forward positions and corporate hedging flows.
- Reported RBI intervention aimed to prevent the rupee from breaching the 92 level, which has knock-on effects for government bond markets and banking system liquidity.
Risks and uncertainties
- Ongoing FX intervention could continue to offset or complicate the RBI’s efforts to bolster banking system liquidity, affecting short-term funding conditions.
- Further rupee weakness may put additional pressure on Indian government bonds, contributing to volatility in debt markets.
- Dependence on corporate hedging and maturing NDFs for dollar demand creates episodic pressures that could recur while such flows persist.