Rupee declined for a third straight session on Thursday as oil prices continued to march higher on worries over the escalating conflict in the Middle East, elevated dollar demand linked to derivative maturities and corporate hedging.
The rupee weakened 0.3% to end the session at 95.44 per dollar, its steepest single-day loss since mid-July.
State-run banks were spotted selling dollars, most likely on behalf of the Reserve Bank of India, traders said, while also noting that the scale of such dollar sales had mellowed compared to last week.
The central bank had deployed at least $8 billion in the previous trading week to support the rupee, Reuters reported citing bankers, which kept the rupee perched above the 95-per-dollar mark.
However, the intensity of the intervention appears to have diminished in the face of the more than 6% rise in oil prices this week.
Concurrently, the central bank has tapped dollar-rupee sell/buy swaps as a way to drain excess INR liquidity from the banking system. It conducted such swaps for a second straight day on Thursday, traders said, with operations in September and December maturities.
Forward premiums soared in response, with the one-year annualised implied rate up almost 30 basis points over two days and last at 3.37%, the highest since late May.
Elsewhere, most Asian currencies slipped and the dollar index nudged higher while the euro was little changed heading into a policy decision by the European Central Bank.
A rate hike by the ECB is widely expected while the Federal Reserve and Bank of Japan will deliver policy decisions next week.
“The close proximity of today’s ECB policy meeting, and tomorrow’s U.S. CPI report, which is viewed as pivotal for the Fed’s rate decision this month, are contributing to the lack of movement in the FX market,” MUFG said in a note.