Indian rupee extends rise but falters past 95/USD on importer hedging, outflows

Mumbai witnessed the Indian rupee reaching a one-month high as the central bank's regulatory measures and hawkish remarks took effect. Despite this, the currency was unable to surpass the 95 per dollar point due to persistent dollar demand stemming from importer hedging and portfolio outflows. The rupee peaked at 94.77 per dollar in early trading and ended the day at 95.15, marking a 0.1% increase.

Experts from DBS cautioned that sustained recovery in the currency would necessitate the mitigation of external factors. They noted that these measures alone may not quell speculation about additional policy actions. Should depreciation pressures resurface, traders might start pricing in a higher likelihood of an aggressive rate hike cycle.

Reserve Bank of India Governor Sanjay Malhotra defended the recent forex curbs, emphasizing their role in deterring speculative bets. He affirmed the central bank's readiness to implement further measures to ensure stable rupee movements, even though monetary policy is not traditionally used to tackle financial stability issues. This dual role raised concerns among traders regarding the central bank's tolerance for further rupee weakness.

The rupee had slipped nearly 7% year-to-date before the implementation of fresh regulatory steps over the weekend, only to recover 2% this week. Swap markets indicate that the rupee is priced for approximately 100 basis points of rate hikes within the next 12 months. Importers in India continue to secure future dollar purchase rates to mitigate the risk of the rupee weakening, despite banks charging higher fees following the central bank's actions.

Investors are eagerly anticipating the release of US consumer inflation data, scheduled for later in the day, to gauge the potential future trajectory of interest rates in the United States, the world's largest economy. The current dollar index stood at 102.2.