(Updates to market close)
By Jaspreet Kalra
MUMBAI, Dec 24 (Reuters) – The Indian rupee closed modestly weaker on Wednesday as dollar demand from local corporates and on account of maturing positions in the non-deliverable forward (NDF) market blunted positive cues from gains in most regional peers.
The rupee ended at 89.7850 per U.S. dollar, down about 0.1% on the day.
Most Asian currencies edged higher but traders said local flow dynamics continued to dominate price action for the rupee, even though it has bounced back from the record-low levels hit last week.
The maturity of positions in the NDF market also spurred dollar-buy bids at the daily reference rate, a trader at a Mumbai-based bank said.
While price-action in the spot market was largely contained, dollar-rupee forward premiums declined sharply after the Reserve Bank of India announced it will conduct a 3-year $10 billion FX swap next month.
The 1-month dollar rupee forward premium fell nearly 15 paisa and the 3-year forward premium was down over 50 paisa.
The swap is part of the central bank’s steps to inject $32 billion of liquidity into the banking system over the next month, which traders reckon will ensure a sustained decline in government bond yields.
India’s 10-year bond yield declined 8 basis points to 6.55% on Wednesday.
“Open market bond purchases provide direct support to the banking system, while the forex swap helps manage rupee liquidity without creating unintended cues on currency policy,” Sachin Sawrikar, managing partner at Artha Bharat Investment Managers, said in a note.
“Together, these measures stabilise money markets, moderate volatility, and ensure smooth transmission of monetary policy.”
Elsewhere, the U.S. dollar was headed for its worst annual performance in more than two decades on Wednesday as investors wagered the Federal Reserve would have room to cut rates further next year even as rate outlooks for its peers diverge.
Many global markets, including India’s, will be shut on Thursday for the Christmas holiday.
(Reporting by Jaspreet Kalra; Editing by Sonia Cheema and Janane Venkatraman)