Mumbai: The Indian rupee remained relatively steady against the US dollar on Thursday as support from the Reserve Bank of India and falling crude oil prices helped balance continuing demand for dollars and growing expectations that the US Federal Reserve could keep interest rates higher for longer.
The rupee opened around 95.44 to the dollar after closing at 95.41 in the previous trading session. Early trading was slightly unsettled, with the currency initially weakening to around 95.52 before recovering to about 95.40. The movement showed that traders were still cautious, but there was no immediate sign of a major shift in the market.
The RBI has become one of the most important forces keeping the rupee from falling further. Traders say the central bank has been active in the foreign exchange market almost every day in recent weeks, particularly when the dollar approaches the 95.60 to 95.80 area. The intervention has helped keep the rupee away from the psychologically important 96 level.
The central bank's approach appears to have changed from simply responding to sharp movements to maintaining a more regular presence in the market. This has helped reduce volatility and made the currency's movements more controlled.
The RBI has also gained additional room to support the currency because of a large increase in foreign currency inflows. Nearly 73 billion dollars entered India between June 8 and August 21 through measures introduced by the central bank. A large part of this money came through foreign currency deposits by non resident Indians.
The additional foreign currency gives the RBI greater flexibility when dollar demand rises. It does not necessarily mean that the rupee will immediately become stronger. Instead, the inflows provide the central bank with a larger buffer to manage periods of pressure and prevent sudden movements.
Oil prices are providing another source of relief. Brent crude was trading below 90 dollars a barrel and around 87 dollars during early Asian trading. The decline in oil prices is important for India because the country depends heavily on imported crude. Cheaper oil reduces the amount of dollars needed by Indian oil companies and can help reduce pressure on the country's trade balance.
The recent decline in oil prices has also been linked to continuing diplomatic discussions involving Iran and Oman over a possible temporary shipping arrangement through the Strait of Hormuz. No final agreement has been reached, but the possibility of reduced disruption to one of the world's most important energy routes has eased some fears in the oil market.
However, the rupee continues to face significant challenges.
Indian companies are maintaining strong demand for dollars as they hedge future payments and protect themselves against further currency weakness. Importers are particularly active when the rupee strengthens, limiting the currency's ability to make a sustained recovery.
At the same time, expectations about US monetary policy are creating another source of pressure. Recent economic data have increased expectations that the Federal Reserve could consider another interest rate increase. A higher US interest rate can strengthen the dollar and make emerging market currencies such as the rupee less attractive to international investors.
This leaves the RBI facing a difficult balancing act. It wants to prevent excessive rupee weakness, but it also needs to avoid using monetary policy in a way that could hurt economic growth.
For now, traders expect the dollar rupee exchange rate to remain largely range bound. The area around 95.20 could provide support for the rupee, while levels around 95.50 to 95.80 may continue to attract dollar selling and RBI intervention.
The outlook could change quickly if oil prices rise again or if the Federal Reserve signals a more aggressive approach to interest rates. A major deterioration in the Middle East situation could also push crude prices higher and increase India's import costs.
For the moment, however, the rupee is benefiting from a combination of lower oil prices, substantial foreign currency inflows and strong central bank intervention. These factors are giving the currency some breathing room even though underlying pressure remains.
The immediate stability should therefore not be seen as a complete recovery for the rupee. Instead, it reflects a carefully managed market in which the RBI is working to slow the currency's decline while global oil prices and US interest rate expectations continue to determine the direction of the dollar.