Rupee rally stalls as traders eye RBI dollar buying and oil demand return

what happened

According to Reuters, the recovery of the Indian rupee from near-record lows ran into obstacles on Thursday. The currency, which has outperformed Asian peers in November, failed to hold below 94.50-94.60 per dollar, even though oil fell more than 1% and foreign investors kept buying equities. At 11:00 a.m. IST the rate stood at 93.6775 per dollar.

Traders are waiting to see whether the Reserve Bank of India will buy dollars. Four market participants noted strong dollar demand from state-run banks. Last month the central bank opened a dollar supply window for state-run oil refiners and introduced other measures to curb dollar demand. Traders think the regulator may now slow the drain on foreign exchange reserves and rebuild them, which have dipped to a roughly three-month low of $717 billion.

The market is also watching India's October inflation data, due Thursday. Headline inflation is expected to approach the central bank's 6% upper tolerance limit.

why it matters

For markets, the bigger question is whether monetary policy tightens further. MUFG said that if price pressures come mainly from food and spread into underlying inflation, expectations for more RBI rate hikes would strengthen and could give the rupee extra near-term support.

market impact

Rupee: possible RBI dollar buying and tightening expectations could support USD/INR

• ↔USD/INR mixed — RBI dollar purchases and refiner demand push the rate up, while tightening expectations support the rupee

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instruments