Rupee monthly decline, premiums unchanged in July.

Rupee monthly decline, premiums unchanged in July.

Indian Rupee Drops as Central Bank Intervention Persists

The Indian rupee faced a decline on Monday, signaling a monthly decline, due to the intervention of the Reserve Bank of India (RBI), which seems determined to prevent the currency from appreciating further. With the rupee trading at 82.2625 to the dollar, down from 82.2475 on Friday, it is down 0.3% for the month of July.

Central Bank Intervention

Throughout July, the rupee experienced two instances where it reached the range of 81.70-81.75, only to be met with central bank intervention. Traders noted that the RBI bought dollars from public sector banks at that level to curb further rupee appreciation. This intervention by the RBI offset the impact of foreign equity inflows of more than $5.5 billion and a weaker dollar index.

Despite the RBI’s determination, market experts believe that the rupee will remain confined within the range of 81.70-82.50 for the foreseeable future. This suggests that the central bank is not likely to change its stance on preventing significant appreciation of the currency.

US Federal Reserve Rate Cycle

The decline in the dollar index by 1% in July has contributed to the rupee’s performance. The reduced expectation of the US Federal Reserve raising interest rates has prompted investors to bet that the recent rate hike will be the last one for the year. Capital Economics noted in a recent report that softer US inflation readings in July and August could persuade the Fed to hold off on further rate hikes.

Oil Price Influence

Another factor contributing to the rupee’s fall in July is the rise in oil prices. Brent crude futures, which have seen a 12.5% increase this month, are on track for their best performance in over a year. The increase in oil prices has put pressure on India, a major oil importer, and has had a negative effect on the country’s currency.

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Outlook on Forward Premiums

USD/INR forward premiums have remained relatively stable month-on-month, with the 1-year implied yield at 1.66%. This can be attributed to possible sell/buy swaps by the RBI, as well as a dovish outlook from the Fed. These factors have contributed to the stability of forward premiums despite the rupee’s decline.

In conclusion, the Indian rupee continues to face downward pressure in July, as the RBI persists in its efforts to prevent the currency from appreciating. Factors such as central bank intervention, the US Federal Reserve rate cycle, and the rise in oil prices have all influenced the rupee’s performance. With the current outlook, it is expected that the rupee will remain within a limited range for the time being.

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