Indian rupee boxed in range; traders focus on oil, outflows and RBI's defence

The Indian rupee remained relatively stable against the dollar on Tuesday, fluctuating within a narrow range. By the end of the day, it was trading at 95.1150 per dollar, showing only a marginal gain from the previous day's level of 95.1850. Traders attributed the stability to ongoing support from the Reserve Bank of India (RBI), which has spent approximately $80 billion since June to defend the local currency.

However, external factors such as rising oil prices and capital outflows continue to weigh on the rupee's strength.

Former Reserve Bank of India governor Raghuram Rajan cautioned against focusing too narrowly on the rupee's exchange rate, advising against depleting foreign exchange reserves to prop up the currency. High oil prices, currently hovering near $117 per barrel, are a significant concern for India, as the country imports around 90% of its oil needs. This reliance on imported oil exacerbates the economic outlook, impacting foreign portfolio investments and the current account balance.

Foreign investors have been net selling around $8.5 billion worth of Indian equities over the past two months, further contributing to currency weakness. The volatility in equity markets, combined with the allure of higher returns from dollar-denominated fixed income investments, is prompting investors to reconsider their portfolio allocations. Additionally, elevated US Treasury yields have added pressure on the rupee, as investors seek better returns in risk-free assets.

The RBI's intervention remains crucial for providing short-term support to the rupee, yet its effectiveness will be closely monitored. Traders are watching the central bank's actions, along with measures to restrict dollar buying, as they could influence the rupee's trajectory. With the 10-year US Treasury yield around 5%, investors are increasingly favoring fixed-income instruments, which may further impact the local currency's performance.