Rupee Posts Weekly Fall to 96.73 Against Dollar Despite Rate Hike
Key Takeaways
- •The Indian rupee ended the week at 96.73 per US dollar, posting a weekly loss even after a recent interest rate increase.
- •Adverse capital flows and weak market sentiment offset the yield-appeal support that a rate hike typically provides to a currency.
- •Dollar sales from state-run banks helped limit the rupee's decline, but the currency still sits near its record-low levels against the dollar.
- •India's foreign exchange reserves have declined over the past four weeks, shrinking the buffer the Reserve Bank of India can draw on to ease volatility.
- •Analysts foresee further downside for the rupee, with capital flow direction, market sentiment, and the reserves drawdown identified as decisive near-term factors.
The Indian rupee closed at 96.73 against the US dollar, ending the week lower despite a recent interest rate hike, as adverse capital flows and weak market sentiment weighed on the currency, according to an Economic Times report.
The unit showed minimal movement from its previous close, with dollar sales from state-run banks helping to cushion the decline. Even with that support, the rupee remains near its record-low levels against the dollar.
Analysts foresee further downside for the currency amid challenging market conditions, according to the report. The rupee's stability has also been affected by a decline in India's foreign exchange reserves over the past four weeks.
Rate increases typically lend support to a currency by raising the yield appeal of assets denominated in it, although sustained outflows and subdued sentiment can offset that effect. India's foreign exchange reserves, managed by the Reserve Bank of India (RBI), serve as a buffer the central bank can draw on to smooth volatility. The RBI has historically intervened in the currency market through state-run banks to curb abrupt swings in the rupee while refraining from targeting any specific exchange-rate level. For now, the direction of capital flows, the state of market sentiment, and the persistence of the reserves drawdown stand out as the factors to watch in assessing the rupee's near-term path.
