The Indian rupee is positioned to continue its recovery trend on Monday, following a sharp bounce-back in the previous trading session, supported by the Reserve Bank of India’s (RBI) market intervention. As speculative dollar-long positions were unwound, the rupee is seen strengthening further, with forecasts suggesting it will open at around 85.40-85.42 against the U.S. dollar.
RBI’s Strategic Market Moves Lead to Dollar-Long Liquidation
In a bid to counter the rupee’s slide, the RBI has been actively intervening in the foreign exchange market, triggering a liquidation of speculative dollar-long positions. On Friday, the rupee hit a record low of 85.8075, prompting the central bank to step in with aggressive dollar sales. These moves were seen as necessary to stabilize the currency after weeks of pressure stemming from global market dynamics.
Traders believe that the RBI’s intervention was critical in flushing out excessive dollar positions. “The excessive positions are being flushed out now that the RBI has intervened with intent,” said a currency dealer from a mid-sized private bank. He suggested that the rupee’s recovery might continue, though he expected the level to stabilize around 85.30, with little chance of breaching that threshold for now.
U.S. Treasury Yields and Trade Policy Concerns Weigh on the Rupee
Despite the RBI’s intervention, the rupee’s path remains fraught with challenges, notably the persistent strength of the U.S. dollar. A key factor that continues to put pressure on the Indian currency is the rise in U.S. Treasury yields. Last week, the 10-year U.S. yield climbed to its highest point since April, largely due to expectations that U.S. President-elect Donald Trump’s trade and immigration policies would lead to higher inflation and a ballooning U.S. deficit.
The increase in yields has helped support the U.S. dollar index, which in turn keeps the rupee under pressure. Analysts caution that unless U.S. yields show signs of retreating, the rupee may find it difficult to make significant gains. “Unless the trajectory of U.S. yields turns, the rupee will have it difficult,” the currency dealer remarked.
Short-Term Recovery on Speculative Dollar-Long Position Exit
In the short term, however, the rupee’s recovery is likely to gain momentum as speculative traders unwind their dollar-long positions. The foreign exchange market has been abuzz with activity following the RBI’s intervention, and the rupee’s rally could extend further if there are no sudden shocks in the global markets.
The intervention by the central bank has alleviated some of the pressure on the rupee, which had been struggling for weeks. Concerns over Trump’s impending trade policies, combined with a rally in U.S. Treasury rates, had left the rupee vulnerable to dollar demand in the non-deliverable forward market.
Despite these challenges, the RBI’s actions have helped stabilize the currency, and traders remain hopeful that the rupee could continue to strengthen, albeit with limitations due to external factors like rising U.S. yields.
