The Indian rupee weakened for a third consecutive session on Thursday, signaling that a recent recovery engineered by central bank intervention may be losing momentum as traders shift their focus to the Reserve Bank of India’s upcoming policy decision and escalating geopolitical risks in the Middle East.
The currency slipped to 95.7550 per U.S. dollar during afternoon trading, edging closer to session lows after closing at 95.7050 on Wednesday. While the move was modest, it highlighted growing caution among investors who are questioning whether the factors that supported the rupee’s rebound over recent weeks can continue to offset external pressures.
The rupee had staged a notable recovery after falling to a record low of 96.96 in mid-May. That turnaround was driven largely by aggressive intervention from the Reserve Bank of India (RBI), which reportedly stepped into both spot and forward currency markets to stabilize the exchange rate and curb speculative pressure.
The intervention achieved two important objectives. First, it halted a rapid depreciation that risked undermining investor confidence. Second, it pushed down foreign-exchange forward premiums, easing hedging costs for market participants and helping restore stability to currency markets.
However, the decline in forward premiums is now creating a new dynamic. Lower hedging costs have encouraged importers to lock in future dollar requirements, increasing demand for the U.S. currency and placing renewed pressure on the rupee. At the same time, exporters have less incentive to hedge future foreign-currency earnings, reducing a traditional source of dollar supply in the market.
“The RBI’s activity has provided breathing room for the rupee and dragged down FX premiums,” a currency trader at a private-sector bank said.
But the trader cautioned that if Friday’s policy announcement fails to include measures aimed at supporting the currency, renewed weakness could emerge now that the rupee has recovered from its record lows.
The policy meeting has become a major focus for financial markets because expectations remain unusually divided. Most economists expect the RBI to leave interest rates unchanged, reflecting concerns about balancing inflation risks against growth considerations. Traders, however, remain more evenly split between a pause and a possible rate increase.
A rate hike would likely provide short-term support for the rupee by increasing the attractiveness of Indian assets and widening interest-rate differentials with developed markets. Yet many market participants remain skeptical that tighter monetary policy alone would be enough to sustain a stronger currency if global conditions deteriorate.
External factors continue to pose significant challenges.
Asian currencies broadly weakened on Thursday as investors reacted to renewed tensions between the United States and Iran. Concerns over disruptions to energy supplies and global trade routes have fueled demand for safe-haven assets, strengthening the U.S. dollar against many emerging-market currencies.
The stakes from these factors are high because of India’s dependence on imported crude oil. Higher energy prices typically widen the country’s trade deficit, increase inflationary pressures, and raise demand for dollars, all of which tend to weigh on the rupee.
The latest market moves suggest investors are becoming increasingly sensitive to geopolitical developments. Oil prices remain elevated compared with levels seen earlier this year, and uncertainty surrounding negotiations between Washington and Tehran continues to cloud the outlook for global financial markets.
The RBI, therefore, finds itself confronting a complex policy environment. On one hand, inflation risks linked to higher oil prices may argue for maintaining a hawkish stance. On the other hand, tighter financial conditions could weigh on domestic growth at a time when policymakers are seeking to sustain economic momentum.
The central bank’s recent interventions have bought valuable time, but market participants will be looking for clearer signals about how authorities intend to defend the currency if global volatility intensifies.
Beyond the immediate policy decision, investors will closely monitor whether India can attract stronger capital inflows. Expectations that the government and central bank could introduce measures to encourage foreign investment have contributed to the rupee’s recovery in recent weeks. Any disappointment on that front could leave the currency vulnerable once again.
For now, the rupee remains significantly stronger than its mid-May record low, but Thursday’s decline underpins the fragility of that recovery.
