Mumbai: The Indian rupee briefly weakened beyond ₹96 against the US dollar on Thursday, reaching its weakest level in more than a month, as a stronger dollar and a Federal Reserve rate increase added to pressure on the currency.
The rupee fell to around ₹96.08 per dollar in early trading after the US Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday. The currency later recovered to around ₹95.90, helped by suspected intervention by the Reserve Bank of India and traders reducing bets against the rupee.
State owned banks were seen selling dollars in the market. Traders said the sales were likely being carried out on behalf of the Reserve Bank of India, although the central bank has not publicly confirmed the specific intervention.
The movement came a day after the Federal Reserve raised its federal funds target range to 3.75% to 4%. It was the first US rate increase since 2023. The US central bank also indicated that interest rates could remain relatively high as it continues to deal with elevated inflation.
The Federal Reserve said inflation remained elevated and that the latest rate increase was intended to support a timelier return to its 2% inflation target. Its latest economic projections put the median federal funds rate at 4.1% at the end of 2026, although the projections are not a commitment to a particular future policy decision.
The Fed decision strengthened the dollar and added to pressure on Asian currencies. Higher US interest rates can make dollar assets more attractive to investors, increasing demand for the US currency and putting pressure on emerging market currencies such as the rupee.
India is also facing pressure from high oil prices. Oil prices remained above $100 a barrel on Thursday, although they moved lower during the day as concerns about some supply disruptions eased.
High oil prices are particularly important for India because the country depends heavily on imported crude oil. More expensive oil can increase India's demand for dollars to pay for imports and put additional pressure on the country's external finances.
The rupee has already weakened significantly in recent sessions. It closed at ₹95.9550 against the dollar on Wednesday after touching ₹95.9750, its weakest level since late July. The currency then moved beyond the ₹96 level on Thursday before recovering.
The Reserve Bank of India has been closely watching the currency market as pressure has increased. Traders also said the central bank may have conducted dollar rupee swaps as part of its efforts to manage liquidity in the banking system.
The pressure is also being reflected in India's bond market. The yield on the benchmark 10 year government bond moved higher after the Federal Reserve decision. Market participants have increased their bets on possible interest rate increases by the Reserve Bank of India over the coming year.
Swap markets were pricing in about 90 basis points of possible RBI rate increases over the coming year. This is a market expectation and does not mean that the RBI has announced plans to raise rates.
India is also facing wider external risks. Investors are watching developments in the Middle East, where the conflict involving Iran has contributed to volatility in oil markets. Changes in oil prices can quickly affect India's import bill and the demand for dollars.
Trade relations with the United States are another factor being watched by investors. Recent US legislation authorises the US president to impose tariffs of up to 100% on countries including India over their continued reliance on Russian energy. India has said it will protect its energy security and warned that such tariffs could affect relations with Washington.
For now, the rupee's move beyond ₹96 has been followed by a recovery rather than a sustained move to weaker levels. The latest movement shows the challenge facing Indian policymakers as global interest rates, oil prices, the dollar and capital flows all influence the currency at the same time.
The coming sessions will be closely watched to see whether the rupee can hold its recovery from the ₹96 level as markets assess the impact of US interest rates, oil prices and global capital flows.