New Delhi: The Indian rupee remained close to its record low against the US dollar on Tuesday as higher US Treasury yields, a stronger dollar and continued foreign investment outflows increased pressure on the currency.
The rupee opened around 96.31 against the dollar on Tuesday after closing at 96.2925 on Monday. It remains close to its record low of about 96.96 reached in May.
The Reserve Bank of India has been increasingly active in the foreign exchange market, selling dollars when the rupee comes under pressure to slow the pace of its decline. The intervention has helped temper the currency's fall, although the pressure on the rupee remains strong.
One of the main sources of pressure is the rise in US Treasury yields. The yield on the 10 year US Treasury note recently reached about 5.35 percent, its highest level since 2002. Higher US yields can make dollar assets more attractive to international investors and put pressure on currencies such as the rupee.
The dollar has also strengthened against other major currencies. The euro has fallen to around a 17 month low amid political and fiscal concerns in Europe. The resulting strength of the dollar has added to pressure on the Indian currency.
US economic data have presented a mixed picture. The US services sector remained resilient in August, while prices paid by businesses for inputs increased, adding to concerns about persistent inflation. The combination of inflation concerns and high US borrowing costs has kept pressure on global financial markets.
Oil prices are another concern for India because the country depends heavily on imported crude oil. Brent crude has remained around $100 a barrel after recently approaching $103, keeping pressure on India's import bill. Recent improvements in oil flows from the Gulf region have helped ease some of the pressure on prices.
Foreign investment outflows are also weighing on the rupee. Foreign investors have sold nearly $29 billion worth of Indian equities so far this year, increasing demand for dollars as money leaves Indian financial markets.
Indian companies are also taking steps to protect themselves against currency movements. Importers booked a record amount of currency hedges in September, highlighting strong demand for protection against further rupee weakness.
The pressure on the currency has coincided with a decline in India's foreign exchange reserves. India's reserves stood at about $747.56 billion for the week ended September 25, down by around $18.34 billion from the previous week. Reserves had reached a record $785.71 billion in the week ended September 4.
The decline in reserves cannot be attributed entirely to foreign exchange intervention because changes in the value of assets held in other currencies can also affect the reserve figure. The decline comes as the RBI has been actively managing pressure on the rupee.
The RBI's net forward dollar liabilities reached about $200 billion in August, highlighting the scale of its foreign exchange operations. The central bank has used forward market operations and other measures as it manages pressure in the currency market.
The rupee's weakness comes as the RBI prepares to announce its next monetary policy decision on Wednesday, October 7. The central bank's current repo rate is 5.25 percent.
Economists widely expect the RBI to raise the policy rate by 25 basis points to 5.50 percent, although the decision had not been announced as of Tuesday. A rate increase could provide some support to the rupee by making Indian assets more attractive, while also affecting borrowing costs and economic activity.
India's inflation rate has also moved above the RBI's 4 percent target. Consumer price inflation was provisionally recorded at 4.82 percent in August, while food inflation stood at 5.95 percent. Inflation remained within the RBI's tolerance range of 2 percent to 6 percent.
For now, the rupee remains close to its May record low but has not broken that level. RBI intervention is helping to temper the pace of the decline, while global bond yields, dollar strength, oil prices and foreign investment flows continue to influence the currency.
The RBI's policy decision on Wednesday will therefore be closely watched by financial markets as investors assess how the central bank will respond to continuing pressure on the rupee.