Mumbai: The Reserve Bank of India is likely intervening in the foreign exchange market as the rupee remains under pressure near 96 to the US dollar, according to traders, with high oil prices and expectations of a US Federal Reserve rate hike adding to pressure on the currency.
The rupee was trading at around 95.87 to the dollar on Wednesday morning, after falling to 95.96 in the previous session. The currency has weakened for seven consecutive sessions and has lost about 1.5 percent during that period.
Three traders told Reuters that state run banks were seen selling dollars in the market, which they believed was most likely being done on behalf of the RBI. The central bank has not officially confirmed the specific intervention.
The latest move comes as the rupee faces several external pressures. Brent crude oil was trading at around 108 dollars a barrel, increasing concerns about India's import bill. India relies heavily on imported crude oil, so higher oil prices can increase demand for US dollars from Indian importers and put further pressure on the rupee.
The currency is also being affected by movements in US financial markets. The yield on the 10 year US Treasury note has moved close to 5 percent, while markets were pricing in a more than 90 percent chance of a US Federal Reserve rate hike on Wednesday.
A higher US interest rate can strengthen the dollar and make dollar assets more attractive to investors. This can add pressure to currencies such as the rupee, particularly when global investors are already concerned about higher energy prices.
The current weakness marks a reversal from the beginning of September. The rupee had strengthened to around 94.30 to the dollar after India received large foreign currency inflows through special measures. The improvement provided support to the currency and strengthened India's foreign exchange position.
The RBI has since been using several tools to manage pressure in the currency and financial markets. Traders have reported regular dollar sales by state run banks, while the central bank has also used dollar rupee swaps as part of its liquidity management operations.
RBI Governor Sanjay Malhotra said last week that the central bank would continue to support the foreign exchange market and that it was keeping its policy tools available to manage liquidity conditions.
The RBI's reported intervention does not appear to be aimed at maintaining a specific exchange rate, according to traders. Instead, the central bank appears to be trying to slow the pace of the rupee's decline as external pressures remain strong.
India's broader economic conditions also add to the challenge. Wholesale price inflation rose to 9.92 percent in August from 9.78 percent in July, according to government data. Fuel and power prices recorded a particularly sharp increase during the month.
India's goods trade deficit stood at 26.8 billion dollars in August. Although the deficit was narrower than expected, higher oil prices remain a concern because of their direct impact on the country's import costs.
India has also built a substantial foreign exchange reserve cushion in recent months. However, a strong reserve position does not remove the pressure created by higher oil prices, movements in US interest rates and changing global capital flows.
The next major focus for currency markets is the US Federal Reserve's policy decision and its guidance on future interest rates. Any change in expectations about US monetary policy could influence the dollar and determine how much pressure continues to fall on the rupee.
For now, the rupee remains close to the 96 to the dollar level, while the RBI appears to be using its foreign exchange resources to prevent a rapid decline rather than targeting a particular exchange rate.