Indian Rupee Strengthens Amid Softer Dollar, RBI Decision in Focus

The Indian rupee edged higher on Friday, supported by gains in regional currencies and a softer US dollar, as markets anticipated the Reserve Bank of India’s (RBI) monetary policy decision.

By 8 a.m. UAE time, the rupee appreciated approximately 0.1%, trading at 23.0667 compared to Thursday’s close of 23.0878. The RBI announced its policy decision shortly afterward, with traders closely monitoring potential measures to address slowing economic growth and inflationary pressures.

Market expectations were centered on the possibility of the RBI implementing a reduction in banks’ cash reserve ratio (CRR) to infuse liquidity into the banking system. This comes after India’s economic growth slowed to a seven-quarter low during the July-September quarter. However, analysts noted that persistently high inflation might deter the central bank from cutting interest rates for now.

Traders cautioned that a surprise rate cut or a dovish stance by the RBI could weaken the rupee further, potentially pushing it to a new record low. Earlier this week, the currency hit a lifetime low of 84.7575 against the US dollar.

Dollar-rupee forward premiums, a critical indicator for future currency movements, were also in focus. Expectations of policy easing and recent dollar-rupee buy/sell swaps conducted by the RBI have contributed to a 25-basis-point decline in the one-year dollar-rupee implied yield so far in December.

“The rupee could gain support from the RBI’s efforts to manage liquidity in the banking system,” said Amit Pabari, Managing Director at FX advisory firm CR Forex. Pabari added that potential downside risks for the rupee may be capped at 85.

Meanwhile, broader Asian currencies showed modest gains of about 0.1% against the dollar. The US dollar index, which measures the greenback’s performance against a basket of currencies, fell to 105.8 after a 0.5% decline on Thursday. The slide came ahead of the release of critical US labor market data later on Friday.

Economists polled by Reuters predict the US economy added 200,000 jobs in November, with the unemployment rate expected to rise slightly to 4.2% from 4.1% the previous month. These figures are likely to influence the Federal Reserve’s policy outlook, adding to global currency market dynamics.

The rupee’s movement, coupled with the RBI’s decisions, will remain under scrutiny as traders assess the central bank’s approach to balancing growth and inflation in a challenging economic environment.