Rupee extends rise but falters past 95/$ on importer hedging, outflows

The Indian rupee extended its rise on Wednesday, reaching a peak not seen in over a month as the central bank's stringent regulatory measures were followed by hawkish commentary. However, the currency's gains were curtailed below the 95 per dollar mark due to sustained dollar demand stemming from importer hedging and portfolio outflows.

The rupee climbed to 94.77 per dollar in early trading and closed at 95.15, marking a 0.1% increase for the day. A substantive turnaround in the currency's performance will necessitate the subsiding of negative global factors. The latest announcements may not entirely alleviate concerns regarding further policy actions, according to a statement from DBS.

Should depreciation pressures resurface, markets might interpret this as a higher likelihood of a front-loaded and more aggressive rate-hike cycle. Reserve Bank of India Governor Sanjay Malhotra defended India's recent forex curbs as a measure to deter speculative bets and expressed readiness to implement additional steps to ensure stable rupee movements.

He emphasized that while monetary policy is not traditionally used to tackle financial stability issues, the two are inherently interconnected. Traders interpreted Malhotra's remarks as an indication of the central bank's limited patience for further rupee weakness. The South Asian currency had declined by over 7% year-to-date but has since risen by 2% in the current week.

Rupee swap markets are currently pricing in potential rate hikes of nearly 100 basis points over the next year. Importers in India are continuing to lock in future dollar purchase rates to safeguard against the rupee's weakening trend, even as banks charge higher fees following the central bank's interventions. Investors are eagerly awaiting US consumer inflation data, set to be released later, as a key indicator for the Federal Reserve's future interest rate decisions. The dollar index currently stands at 102.2.