Indian rupee hits 2-month low
What's the story
The Indian rupee has hit its lowest level in over two months, falling to 96.43 against the US dollar on Tuesday. The drop is mainly due to continued foreign selling of local assets and is raising speculation about possible intervention from the Reserve Bank of India (RBI). The currency had hit a record low of 96.96 in May this year.
Central bank response
Central bank may not resist pressure indefinitely
Despite almost daily interventions through dollar sales to stabilize the local currency, traders believe the central bank may not be able to resist this pressure indefinitely.
DBS said in a note, "While the FX intervention response has been strong, the central bank will prefer to time dollar sales to rationalize the use of the reserves buffer and prevent widening the ballooned short FX forward book."
Reserve growth
One-off policy measures boost foreign exchange reserves
One-off policy measures have boosted India's foreign exchange (FX) reserves by attracting over $140 billion in capital inflows.
These inflows, absorbed via swaps by the central bank, appear as a forward liability and have expanded the net size to about $200 billion by August-end.
The central bank's policy decision is also due on Wednesday, with a 25 basis point hike widely expected.
Future forecast
Forward markets more bearish on rupee
The inflow haul is expected to keep the rupee steady, with economists and analysts expecting only a modest decline to 97.50 over the next 12 months.
However, forward markets are more bearish on the unit, with the one-year outright forward quoting around 99.70 on Tuesday.
None of the polled analysts expect the rupee to breach the psychologically key 100-a-dollar mark over the next year.