Rupee To Open Slightly Stronger As Dollar Softens, But RBI’s Firm Grip Keeps Currency Range-Bound Near Record Lows

A softer dollar may hand the Indian rupee a small boost at the open on Thursday, though traders say the Reserve Bank of India's steady hand remains the bigger driver.

The 1-month non-deliverable forward indicated the rupee will open in the 88.74-88.76 range versus the U.S. dollar, up from 88.7975 on Wednesday.

The Indian currency has been trading in a narrow range near all-time lows, with the RBI’s persistent dollar sales helping to anchor volatility. Bankers expect the central bank to continue smoothing moves.

"Feels like we’re trading with a ceiling (on dollar/rupee) — the RBI’s running the show,” a currency trader at a Mumbai-based bank said.

"Broadly, the RBI seems comfortable with a measured rupee drift. The only question is when they’ll step back and let it happen (let the rupee weaken more)."

The RBI’s persistent intervention has effectively crushed rupee volatility. The 10-day annualised realized volatility has fallen to multi-month lows, while the one-month implied has slipped close to its year-to-date trough.

On the flows side, dollar demand from importers, particularly oil companies, remains firm, while equity outflows continue to weigh on the rupee. Two initial public offerings this week- LG Electronics India and Tata Capital - were expected to attract foreign interest, though they have had limited impact on the market so far.

DOLLAR DIPS

The dollar index dipped modestly in Asian trade on Thursday while most regional currencies rose slightly.

Political turbulence in Japan and France, along with the ongoing U.S. government shutdown, helped the dollar this week prior to Thursday's dip, with the yen bearing the brunt of Japan’s political uncertainty.

Meanwhile, the minutes from the Federal Reserve's September meeting on Wednesday showed most policymakers favoured cutting rates again this year.

Despite expectations of further Fed rate cuts this year, political uncertainty in France and the prospect of a slower pace of tightening by the Bank of Japan are likely to keep the dollar supported in the near term, MUFG Bank said in a note.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 88.87; onshore one-month forward premium at 13.5 paise

** Dollar index down at 98.7

** Brent crude futures down 0.6% at $65.8 per barrel

** Ten-year U.S. note yield at 4.11%

** As per NSDL data, foreign investors bought a net $187.5mln worth of Indian shares on Oct. 7

** NSDL data shows foreign investors sold a net $62.9mln worth of Indian bonds on Oct. 7