The Indian rupee dipped on Thursday, extending a two-session decline, ahead of Friday’s all-important Reserve Bank of India monetary policy review, where traders are widely anticipating steps to support the currency.
The rupee closed at 95.7850 per US dollar, from 95.7050 on Wednesday. The currency meandered in a narrow range through the session, pressured by weaker Asian peers and importer hedging after a central bank intervention-led relief rally.
The rupee has recovered ground after the Reserve Bank of India’s intervention in spot and forward markets helped it rebound from a record low of 96.96 hit around mid-May.
The RBI’s activity has provided breathing room for the rupee and dragged down FX premiums, a currency trader at a private sector bank said.
Lower forward premiums reduce the cost for importers to hedge future dollar payments, while disincentivising exporters from hedging.
Market expectations of measures to boost inflows and support the currency have further aided the recovery.
India may cut capital gains tax on foreign investment in government bonds as one way to boost inflows, Reuters and other news media reported on Thursday. Other measures widely anticipated include schemes incentivising non-resident deposits and hedging cost relief for companies raising overseas debt.
If Friday’s RBI policy does not deliver steps to support the currency, expect renewed pressure, especially now that the rupee has corrected and forward premiums have come off, the trader added.
The RBI is expected to keep interest rates on hold on Friday, according to most economists, though traders are more evenly split on whether the central bank will opt for a hike or keep the policy repo rate unchanged.
A rate hike is expected to lift the rupee, though traders doubt how long the relief would last.
Meanwhile, most Asian currencies weakened and regional equities slipped. Renewed US-Iran hostilities rattled risk assets, while mixed signals on de-escalation kept investors wary.