The rupee closed at fresh low due to broad-based dollar bids and declining Chinese yuan, said forex traders.
On Tuesday, after hitting low of 85.66 against the dollar, the currency settled at 85.61, down by 7 paise or 0.08%.
Towards the end of the trading session, the Reserve Bank of India stepped in to prevent any sharp fall in the domestic currency, helping it to recover from the low of 85.66.
Consequently, state-owned banks sold dollar on behalf of the central bank.
While the Chinese currency, yuan fell to 7.34% on account of poor purchasing manager index data. Wednesday being a US holiday, the demand for cash will be limited, hence the rupee is expected to be in a range of 85.40-85.70.
The cash position is also expected to revert back to normal.
Since the system liquidity remained in the deficit, the premiums were also higher, taking the 1-year premiums to 2.55% and 1-month to 3.80%.
For the last three months, the rupee has been on the depreciating path. However, the intervention from the apex bank has kept any free fall in the currency at bay.
At the same time, it has allowed a gradual depreciation, a prudential strategy when other emerging market currencies are fall against the dollar.
In 2025, the domestic currency is expected to remain under pressure due to expectations of strong dollar, driven by the US Federal Reserve’s rate cut strategy and US government policies under the new president, Donald Trump.
Headwinds have increased for the Indian rupee in the last few weeks due to various factors such as outflows by foreign portfolio investors for equities, a strong dollar index, a likelihood of fewer rate cuts by the US Federal Reserve in 2025, India’s sluggish growth, and widened merchandise trade deficit.
“Dollar index is expected to move higher towards 109-112 on a stronger US economy and slower cutting of rates by Fed, posing a tricky situation for the rupee. It needs to be seen how market navigates this situation,” said a forex trader with a state-owned bank.
In 2024, rupee depreciated by 240 paise or 2.88% as compared to 47 paise or 0.57% in 2023. The RBI has intervened heavily both in spot and forward markets. This was evident from the sale of dollars in the forward market by the RBI in the last seven to eight months and a drop in foreign exchange reserves.
All this intervention has helped the Indian rupee to remain less volatile among its Asian peers so far in 2024. The rupee has depreciated 2.72 percent year-to-date, according to Bloomberg data.
Looking ahead, the intervention from the central bank is likely to reduce as direct intervention in the currency market led to a deficit in the rupee liquidity. It will be more active in the offshore or over the counter market, which serves multi purposes viz, curbing volatility in the market, preventing forex reserves from depletion, and lending support to the rupee liquidity, said market participants.