Rupee Hits Three-Month High As RBI Eases Dollar Buying On Fed Signal, FII Flows

The Indian rupee hit its highest level in nearly three months on Friday on the back of persistent foreign fund inflows and some easing in the Reserve Bank of India's dollar buying, two currency traders said on the condition of anonymity.

The rupee closed the trade at Rs 83 a dollar, after hitting a high of Rs 82.95 earlier in the day. On Thursday, the Indian currency closed at Rs 83.33 against the greenback.

Foreign fund inflows in favour of two large companies boosted the Indian currency, the traders said.

The expectation of three rate cuts by the US Federal Reserve in 2024 may have also prompted the Indian central bank to ease its currency intervention, the traders quoted above said. This is because the prices of dollar-denominated commodities such as gold and crude oil have inched up.

On the Intercontinental Exchange, the prices of Brent futures traded higher following the U.S. Federal Reserve’s indications to cut interest rates in 2024. On Friday, the crude oil futures were trading at $76.86, against $74.26 per barrel on Wednesday.

Considering India is an import-dependent country, a sharp rise in commodity prices increases its imported inflation.

The flows have been coming in, but after the FOMC, the RBI has two options, according to the first currency trader quoted above. Either the Indian regulator could continue absorbing the flows, or let the rupee adjust so that importers do not take a large hit, this trader said.

"We expect the RBI to intervene if rupee breaches 82.50. Fed rate cut expectations are not fully priced in. RBI would not like to artificially keep rupee weak," said Anindya Banerjee, deputy vice president, currency and interest rate derivatives, Kotak Securities.

The RBI has been persistently intervening in the foreign currency market for last few months, and keeping the currency pair in a tight range. The central bank has accumulated $25.5 billion since the end of March 2023 to its foreign currency coffers as of Dec 1, RBI data showed.

Currency traders expect the rupee to hover around 82.80-82.85 a dollar going ahead.