Rupee set to extend recovery on RBI-motivated dollar-long liquidation

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The Indian rupee is poised to rise on Monday, building on the momentum from the previous session in which the central banks’ interventions prompted the exit of speculative dollar-long positions.

The one-month non-deliverable forward indicated the rupee will open at 85.40-85.42 to the US dollar, compared with its close of 85.5325 in the previous session.

The rupee catered to a lifetime low of 85.8075 on Friday, leading to heavy dollar sales by the Reserve Bank of India. On the back of what a trader said “was a very busy intervention”, the speculative dollar-long positions booked profits.

“The excessive positions are being flushed out now that the RBI has intervened with intent,” a currency dealer at a mid-sized private bank said.

“This corrective downward move (on dollar/rupee) likely extends to 85.30 at best, not beyond that. I see this dip an opportunity to buy.”

The rupee has been struggling for several weeks due to dollar demand in the non-deliverable forward market, the weakness in Asian peers on concerns over US President-elect Donald Trump‘s trade policies, the rally in US Treasury rates and the dip in India’s growth rate.

The RBI has been intervening to slow the pace of the currency’s decline, although its dollar sales have been a big factor in driving India’s forex reserves to a seven-month low.

High US yields to keep rupee in check

The 10-year US yield last week climbed to its highest level since late April amid expectations that Trump’s trade and immigration policies would lift inflation and his planned tax cuts would add to the US debt load.

The jump in yields is keeping the dollar index well supported.

“Unless the trajectory of US yields turns, the rupee will have it difficult,” the currency dealer said.

Key Indicators

** One-month non-deliverable rupee forward at 85.70; onshore one-month forward premium at 28 paisa

** Dollar index at 108

** Brent crude futures up 0.1 per cent at $74.2 per barrel

** Ten-year US note yield at 4.63 per cent

** As per NSDL data, foreign investors sold a net $186.7 million worth of Indian shares on December 26

** NSDL data shows foreign investors bought a net $4 million worth of Indian bonds on December 26