Rupee’s Downward Trend Likely to Continue; RBI Expected to Intervene

The Indian rupee is anticipated to face further depreciation on Wednesday due to a rise in the dollar index and a potential slowdown in equity inflows.

Non-deliverable forwards suggest the rupee will open at 83.70-83.71 against the U.S. dollar, slightly weaker than the previous session’s close of 83.6875. On Tuesday, the rupee hit a record low of 83.7150, driven by volatile local equity markets, prompting the Reserve Bank of India (RBI) to step in.

Currency traders expect continued intervention by the RBI to manage the pace of rupee depreciation. “It will be more of the same today, with the RBI intervening to ensure that the dollar/rupee movement remains gradual,” said a bank currency trader. The outlook for the dollar/rupee pair remains tilted towards the higher side, especially following recent budget changes.

The Indian government’s decision to increase taxes on equity investment profits and derivatives trades has led to market volatility. This fiscal change has raised concerns about foreign equity inflows, which had previously supported the rupee. On Tuesday, foreign investors withdrew over $350 million from Indian shares, despite having invested nearly $5 billion earlier this month.

Adding pressure, the dollar index saw a slight increase in Asia, continuing its advance from Tuesday. The index’s rise comes even as the Japanese yen strengthened, bolstered by speculation that the Bank of Japan might raise interest rates next week.

Upcoming economic data will provide further insights into market trends. The U.S. preliminary July PMI data, scheduled for release later today, will offer indications of manufacturing and services sector performance. Additionally, June-quarter GDP data due on Thursday is expected to confirm a “soft landing” for the U.S. economy, according to ANZ Bank.

KEY INDICATORS:

• One-month non-deliverable rupee forward at 83.77; onshore one-month forward premium at 7 paisa
• The dollar index at 104.49
• Brent crude futures up 0.4% at $81.30 per barrel
• Ten-year U.S. Treasury note yield at 4.26%
• Foreign investors bought a net $997.6 million worth of Indian shares on July 22 (NSDL data)
• Foreign investors purchased a net $4.4 million worth of Indian bonds on July 22 (NSDL data)

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