The Indian rupee ended a six-session winning run on Monday. Trading was thin, and dollar purchases by state-run lenders were stronger than the recent positive mood in the currency.
Currency trading in India will not take place on Tuesday, when a local holiday is observed.
A volatile session
Earlier in the day, the rupee touched a six-month high of 93.69 per dollar. It had rallied by more than 1% over the previous week, so the reversal came after a strong run. By the close, however, it had slipped to 93.9275 per dollar, slightly weaker than the previous close of 93.9050.
Some traders believe the state banks may be buying dollars on behalf of the Reserve Bank of India (RBI). The central bank’s recent measures have helped ease a long-running imbalance between supply and demand for dollars in the foreign exchange market.
Lower crude oil prices took some pressure off the currency. Foreign investors also returned to Indian equities, which offered some support.
What analysts expect
Madhavi Arora of Emkay Global expects the RBI to use any sustained rise in inflows to rebuild its foreign exchange buffers. In her view, the central bank is unlikely to let the rupee appreciate sharply.
She said the RBI’s large net short forward position and India’s continuing current account funding needs are likely to limit the currency’s gains.
The RBI’s net short dollar position in the forward market swelled to an all-time high of nearly $240 billion in September. That leaves the central bank with substantial future dollar commitments, which is one reason analysts see limited room for the rupee to rise quickly.
US data in focus
The US dollar has strengthened after a stronger-than-expected jobs report for October, according to Amit Pabari, managing director at FX advisory firm CR Forex.
US non-farm payrolls rose by 165,000 in October, well ahead of expectations of 65,000. The stronger figure pushed the US 10-year yield higher, drawing money towards dollar assets.
A Reuters poll suggests US retail inflation was likely 3.9% on-year in October. That figure is due on Tuesday evening.
Pabari said a higher-than-expected reading could strengthen expectations of another Federal Reserve rate hike. That would give the dollar fresh support and could keep pressure on the rupee.
For now, traders will be watching the US inflation release closely, along with any sign of further action by state-run banks in the market.