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The Indian rupee stayed close to the 96-per-dollar mark on Wednesday as the Reserve Bank of India stepped into the foreign exchange market to limit losses. High crude oil prices, rising US Treasury yields and expectations of a Federal Reserve rate hike continued to pressure the currency.
The rupee traded at 95.93 against the US dollar at 10:46 a.m. IST. It moved within a narrow eight-paise range during the morning session. The currency had closed at 95.95 on Tuesday, compared with 95.55 in the previous session.
The rupee had been expected to open weaker as the dollar strengthened ahead of the Federal Reserve's policy decision. However, traders said the RBI sold dollars through state-run banks, helping prevent a sharper fall.
The central bank has maintained a regular presence in the currency market in recent sessions. At the same time, it has used dollar-rupee sell-buy swaps to manage excess rupee liquidity in the banking system. Traders said the RBI does not appear to be protecting one fixed exchange rate.
Instead, the central bank has focused on slowing sharp currency moves. Sajal Gupta, head of forex and commodities at Nuvama, said, “The RBI won't let the rupee appreciate, and they have enough ammunition to defend weakness too.” He expects the currency to remain broadly within the 94.50-96.50 range in the near term.
Crude oil remains one of the main pressures on the Indian rupee. Brent crude traded near USD 108 a barrel after rising sharply this month. India imports nearly 85% of its fuel requirements, making the economy sensitive to higher global energy costs.
Oil companies also need more dollars when crude prices rise, increasing demand for the US currency in the domestic foreign exchange market. This demand contributed to the rupee's fall to its weakest level in about three months on Tuesday.
Anindya Banerjee, head of currency research at Kotak Securities, said currency volatility could remain controlled unless crude rises further. He said, “Volatility will only increase if oil prices jump over USD 115-USD 120 per barrel.”
The Federal Reserve's policy decision is another key factor for the rupee. Markets have priced in a more than 90% chance of a US rate hike, compared with about 60% a week earlier.
Investors will also watch the Fed's updated economic projections and interest-rate forecasts for signals on future policy. Higher US rates can support the dollar and make emerging-market assets less attractive to global investors.
Meanwhile, the US 10-year Treasury yield has moved close to 5%. Rising Treasury yields have added pressure on Asian currencies, including the rupee. CR Forex said there was a higher probability that the Indian currency could weaken toward 96.30-96.50 if current conditions continue.
India's consumer inflation rose to 4.82% in August from 4.45% in July, marking the tenth straight monthly increase. Food inflation increased to 5.95%, while transport-related costs also rose as energy prices climbed.
The RBI kept interest rates unchanged at its August meeting. However, it expects headline inflation to average 5% in the financial year ending March 2027, while core inflation is projected at 4.3%.
Higher oil prices, a weaker rupee and rising transport costs could keep inflation in focus over the coming months. For now, traders are watching the RBI's currency-market activity, crude oil prices and the Federal Reserve decision for the rupee's next move.
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