Rupee may drop to near 84/USD; RBI intervention likely

August 6, 2024

Key points:

• Rupee expected to open at 83.97-83.99 against the U.S. dollar.
• Reserve Bank of India likely to intervene to stabilize the rupee.

The Indian rupee is poised to weaken on Tuesday, with forecasts indicating it could reach an all-time low against the U.S. dollar. The non-deliverable forwards (NDF) market suggests that the rupee (USDINR) will open at 83.97-83.99 to the dollar, slipping past Monday’s close and lifetime low of 83.8450.

Picture: Indian rupee trading at 84.031 on the VT Markets app.

Overnight, the 1-month dollar/rupee NDF (INR1MNDFOR=) climbed to 84.25, driven by concerns over the unwinding of the Japanese yen carry trade. However, it retraced some of its gains and was last seen at 83.06/83.08.

Rupee’s losses mitigated by RBI intervention amid dollar pressure

The upward pressure on the dollar/rupee in the NDF market and broadly is evident. The rupee’s losses on Monday would have been more pronounced if not for the Reserve Bank of India’s (RBI) dollar sales in the onshore over-the-counter (OTC) market. In the OTC market, traders have the comfort of knowing the RBI may intervene, unlike in the NDF market.

Historically, the RBI has intervened in the NDF market just before the onshore OTC opens to cool off the dollar/rupee spot rate. Such intervention is likely again today.

Asian markets rebound as U.S. recession fears ease

Asian shares showed recovery from Monday’s selloff, which was driven by fears of a U.S. recession. Japan’s equity gauge rose about 10%, U.S. equity futures advanced, and Indian equities were set to open higher.

Risk assets found support from reassuring comments by a Federal Reserve official, who stated that a weak July jobs report did not indicate a recession. Additionally, robust U.S. services data added to the positive sentiment.

Signs of economic stabilisation reduce expected Fed rate cuts

Stabilisation signs are emerging as the U.S. services report suggests the economy is growing, adding jobs, and maintaining inflation above target. Investors are now pricing in 110 basis points of rate cuts by the U.S. Federal Reserve this year, down from 125 basis points at one point on Monday.

The dollar index (DXY) is down to 102.79, while Brent crude futures are up 1.3% at $77.3 per barrel. The ten-year U.S. note yield stands at 3.84%. In terms of foreign investments, data from NSDL indicates that foreign investors sold a net $402.1 million worth of Indian shares on August 2, while they bought a net $230.4 million worth of Indian bonds on the same date.

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