Indian rupee hits 10-week closing high as RBI schemes draw hefty dollar inflows

Mumbai witnessed the Indian rupee reaching a 10-week closing high on Thursday, driven by robust dollar inflows under the Reserve Bank of India's special scheme. The currency climbed to 94.4850 per U.S. dollar, marking its highest level since June 25 and the biggest daily gain since July 27. The rupee opened at 94.30 per dollar, but initial gains were curbed by increased importer demand during the trading session.

The Reserve Bank of India's special measures attracted far more inflows than anticipated, indicating the central bank's potential for aggressive management of the rupee using its newly acquired resources. Kunal Sodhani, head of treasury at Shinhan Bank, noted that the higher-than-expected inflows would significantly bolster the RBI's position.

With the RBI's forward short position already at $137 billion, the strategy is likely to evolve from merely defending the rupee against depreciation to actively managing it in both directions.

However, the rupee's upward trajectory was tempered by importer demand that emerged after the initial decline in the USD/INR pair. Medium-term concerns, such as the impact of elevated oil prices on import bills and trade deficits, could weigh on importers, making them more likely to lock in their dollar requirements. As oil prices surge, global bond yields rise, and bets of a Federal Reserve interest rate hike this month strengthen, the 10-year U.S. Treasury yield hovered around 4.78%, nearing its highest level in nearly three years. The probability of a September rate hike stands at approximately 63%.