Under the impact of a strong dollar, the Indian rupee is approaching a historical low, and the Reserve Bank of India may be forced to intervene

Against the backdrop of a strong global dollar, the Indian rupee is facing severe tests, with its exchange rate nearing historical lows.

On the 3rd, the Indian rupee hovered around 88.7875 against the dollar, just a step away from the historical low of 88.80 set in late September. Traders stated that the Reserve Bank of India’s dollar selling actions helped the rupee avoid a more significant decline.

The market generally believes this is the Reserve Bank of India's intervention. Several traders confirmed to the media that the intervention by the Reserve Bank of India aims to support the rupee. Currently, the rupee is not only suppressed by a strong dollar but also faces continuous hedging demand from domestic importers.

The potential intervention by the central bank adds uncertainty to the market. A bank trader in Mumbai stated that at the current level, it has become very difficult to judge the short-term direction of the rupee due to the coexistence of intervention risks and a broader depreciation tendency.

Strong Dollar and Importer Hedging Create Dual Pressure

The main external factor putting pressure on the rupee recently is the general strength of the dollar. On Monday, the dollar index, which measures the dollar against a basket of major currencies, hovered near a three-month high. As a result, Asian currencies performed flat or weakened slightly, and the rupee was no exception.

At the same time, pressure from within India is also significant. Traders pointed out that the continuous dollar buying by Indian importers, aimed at hedging their overseas procurement costs, has exerted a stabilizing pressure on the rupee.

In addition to short-term market factors, deeper policy headwinds have also intensified the depreciation expectations for the rupee. Since the high tariffs imposed by the U.S. on Indian exports took effect in late August, the rupee has faced ongoing pressure.

Moreover, the hawkish stance revealed in the Federal Reserve's policy outlook last week has also impacted the rupee. This hawkish position has altered market expectations for U.S. interest rates, pushing up the dollar. At the same time, the maturity of positions in the non-deliverable forward (NDF) foreign exchange market has also stimulated dollar demand, further weakening the rupee.

Market Focus on Federal Reserve Movements, Short-Term Outlook Under Pressure

Looking ahead, the market's focus will be on the speeches of several Federal Reserve policymakers this week to seek more clues about the future direction of the U.S. benchmark interest rate. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the market currently estimates the likelihood of a Federal Reserve rate cut in December at about 70%, down from over 90% a week ago, reflecting a cooling of market expectations for easing policies.

Amit Pabari, Managing Director of FX consulting firm CR Forex, stated:

“In the short term, due to the continued strength of the global dollar and the market waiting for substantial progress in the U.S.-India trade agreement, the rupee may continue to face moderate pressure, fluctuating within the range of 88.50 to 89.10 ”