Rupee Slides to Over Two-Month Low of 96.42 Ahead of RBI MPC Rate Decision

The Indian rupee weakened to its lowest level in more than two months on Tuesday, pressured by persistent foreign capital outflows from domestic equities and heightened geopolitical tensions in the Middle East. The domestic currency slipped 0.15% to an intraday trough of 96.43 per US dollar—its weakest level since July—before settling the session at 96.42, down 0.1% from the previous close.

The decline brought the currency closer to its historic low of 96.96 logged in May. Deeper losses were kept in check by timely interventions from state-run lenders, which conducted active dollar sales on behalf of the Reserve Bank of India (RBI).

Central Bank Interventions Stem Deeper Fall

Forex dealers noted that in addition to spot dollar sales, the central bank likely engaged in foreign exchange sell/buy swaps alongside open market operations (OMO) and reverse repo transactions to manage excess rupee liquidity within the banking system.

While intervention has shielded the currency from disorderly swings, market participants question how aggressively the RBI can push back against broader macroeconomic currents. A note from DBS highlighted that although the central bank's foreign exchange intervention response has remained robust, policymakers are likely to calibrate dollar sales to rationalize reserve buffers and prevent further expansion of an already enlarged short forward book.

One-off policy actions have expanded India's foreign exchange reserves buffer by drawing more than $140 billion in capital inflows, which were absorbed via swaps to reach an expanded forward liability size of nearly $200 billion by late August.

All Eyes on MPC Policy Decision

Currency traders have turned their attention to the RBI Monetary Policy Committee (MPC) resolution scheduled for Wednesday.

A Reuters survey revealed that approximately 60% of 61 participating economists expect the rate-setting panel to increase the benchmark repo rate by 25 basis points, marking what would be the first rate hike since February 2023. Money markets have even priced in a modest probability of a steeper 50-basis-point move.

Analysts at J.P. Morgan noted:

"We believe a combination of a 25 bps hike with hawkish guidance, tactical OMO sales and sell-buy FX swaps would provide some near-term protection for the rupee and thereby allow the pace of monetary tightening to be geared to domestic growth-inflation dynamics."

A rate increase would support the rupee by raising the cost of holding short positions against the currency, particularly amid elevated oil import bills resulting from ongoing energy disruptions.

Key Factors Driving the Currency Slump

Primary Pressures on the Rupee:

• Foreign Portfolio Outflows: Sustained selling across Indian equities and domestic assets has generated consistent dollar demand, limiting gains in the broader benchmark indices.
• Energy Supply Concerns: Elevated crude oil prices tied to geopolitical friction in the Middle East continue to stoke concerns over India’s import bill and current account deficit.
• Firm US Bond Yields: Stronger global bond yields have supported the US dollar index near 102 levels, dampening appetite for emerging market assets.

Forward Markets vs. Analyst Projections

While the currency has slipped, macroeconomic forecasters project moderate resilience in the rupee over the medium term compared to derivatives markets. The 1-year outright forward contract traded near 99.70 per dollar on Tuesday.

In contrast, consensus forecasts from polled economists estimate the currency to trade near 97.50 against the dollar over the next 12 months. Major global brokerages—including Bank of America, Barclays, and United Overseas Bank (UOB)—do not anticipate the rupee breaching the psychological 100-per-dollar threshold over the coming year, forecasting the unit at around 99 per dollar by late 2027.

Tags: Reserve Bank of India Indian Rupee USDINR Monetary Policy Committee Foreign Portfolio Investors US Dollar Index