The Indian rupee notched a 10-week closing high on Thursday, buoyed by stronger-than-expected dollar inflows under the central bank’s special scheme, even as importer demand pared some of the currency’s earlier gains.
The rupee closed 0.5% higher at 94.4850 per U.S. dollar, its highest level since June 25. The currency also posted its biggest daily gain since July 27.
The rupee opened at 94.30 per dollar but trimmed gains to 94.49 during the session as importer demand picked up.
Sentiment was boosted after the Reserve Bank of India’s special measures drew far more inflows than economists had expected, reinforcing views that the central bank could aggressively use its recently acquired firepower to manage the rupee.
“Higher-than-expected inflows will materially strengthen the RBI’s hand. With the RBI’s forward short position already around $137 billion, the strategy is likely to shift from simply defending the rupee against depreciation towards active two-way management,” said Kunal Sodhani, head of treasury at Shinhan Bank.
“The RBI can continue selling dollars on sharp USD/INR rallies, but use the abundant dollar supply to absorb dollars on deeper dips, rebuild reserves and manage the forward-book exposure.”
Still, importers demand emerged since the opening dip in the USD/INR pair, limiting further gains, traders said.
Over the medium term, elevated oil prices remain a key concern for importers after renewed military tensions between the U.S. and Iran.
A sustained rise in oil prices would widen India’s import bill and put pressure on the trade deficit, making importers more inclined to lock in their dollar requirements.
The rally in crude is fuelling inflation concerns, pushing global bond yields higher, and strengthening bets of a Federal Reserve interest rate hike this month.
The 10-year U.S. Treasury yield was around 4.78%, hovering around its highest level in almost three years, with the odds of a September rate hike at around 63%.