Indian Rupee’s Brief Respite: Why Its Push Past 90 Might Not Last

The Indian Rupee recently made headlines by strengthening past the 90-per-dollar mark, a move largely attributed to aggressive intervention by the Reserve Bank of India (RBI). While this might seem like a victory for the domestic currency, market experts and currency traders are warning that this newfound strength could be short-lived.

RBI’s Strategic Move: A Familiar Playbook?

On Wednesday, the rupee advanced a notable 0.3% to 89.88 against the US dollar. This rally wasn’t organic; it was the result of the RBI stepping in with significant dollar selling, a tactic it has employed multiple times in the past to prevent one-way speculative moves against the rupee. The 1-month non-deliverable forward suggests an opening in the 89.92-89.96 range on Thursday, indicating some immediate pullback.

Hedging and Dollar Strength: A Double Whammy

However, the moment the rupee crossed the 90-per-dollar threshold, two significant factors kicked in that threaten to reverse its gains:

1. Increased Hedging Demand: Importers, seeing the rupee at a more ‘attractive’ level, quickly ramped up their hedging activity. This involves buying dollars to protect against future currency depreciation, effectively creating fresh demand for the greenback.
2. Renewed Dollar Long Positions: Speculators and other market participants viewed the RBI-led dip as an opportunity to build long dollar positions, rather than a fundamental shift in the rupee’s trajectory. As one currency trader put it, “The move lower (on dollar/rupee) doesn’t change the underlying bias. The fundamentals point higher, and RBI-led dips are an opportunity (for importers and speculators).”

Global Headwinds: The Mighty Dollar

Beyond domestic dynamics, the rupee faces external pressures from a strengthening dollar index. Most Asian currencies are feeling the heat amid a generally tepid global risk environment. This firmer dollar makes it challenging for the rupee to sustain its upward momentum.

Mixed Signals from the US Economy

Recent US economic data presents a mixed picture, further complicating the global currency outlook:

• Subdued Labor Market: Job openings fell more than expected in November, and hiring eased, suggesting a cooling labor market.
• Robust Services Sector: Surprisingly, services activity picked up significantly in December, marking the highest reading since October 2024. This indicates the US economy ended 2025 on a much firmer footing than anticipated.

This robust services data has led ING Bank to note that it “clouds the Fed rate cut story.” Investors have been heavily pricing in at least two further rate cuts by the Federal Reserve this year, following three consecutive cuts in recent meetings. Strong economic data, especially in services, could give the Fed more reason to hold off on aggressive easing, thereby supporting the dollar.

The Road Ahead: A Tug-of-War

In essence, while the RBI successfully nudged the rupee past the 90-mark, this push seems to be more of a tactical maneuver than a fundamental shift. With underlying dollar strength, persistent hedging demand, and a complex US economic picture potentially impacting Fed policy, the Indian rupee is likely to face an uphill battle to maintain its recent gains. Traders will be closely watching for further RBI intervention, but the prevailing sentiment suggests that any dips might just be seen as buying opportunities for the dollar.

Source: Original Article