Markets India

The Indian rupee gained 15 paise, closing at 95.81 against the US dollar on Friday, driven by Reserve Bank of India (RBI) interventions and large public sector banks selling US dollars. The benchmark 10-year bond yield hit 7.14%, its highest in four months, as the central bank's market actions and dollar liquidity management helped stabilize the currency amid external financing pressures.

The RBI's active intervention in the currency market, including dollar-rupee sell-buy swaps, absorbed excess rupee liquidity and supported the rupee's recovery to 95.81. Public sector banks reportedly sold dollars at the central bank's direction, while exporters also contributed to dollar supply. The one-year forward premium on the rupee climbed to 3.5%, a level not seen since May.

The rupee's rebound came despite global crude prices near $105 per barrel, which heightens import inflation risks. The RBI's deputy governor, Poonam Gupta, signaled the rupee was overcorrected, potentially easing depreciation pressures. However, analysts warn that external financing needs and rising global capital costs remain key risks to currency stability.

Market participants noted the RBI's pre-market liquidity management helped the rupee open at 95.90, while bond yields spiked to 7.14% before easing slightly. This aligns with global yield tightening, as US 10-year Treasury yields surpassed 5.20% and Japan's 10-year yield reached 3.115%, its highest since 1996. Siddharth Chaudhary of Bajaj Asset Management highlighted that domestic rate cuts could strain currency stability by reducing real yields relative to inflation.

Public sector banks and importers were key stakeholders, with the latter securing dollars ahead of a potential bank strike for month-end payments. While the RBI's actions may temporarily ease depreciation risks, structural challenges from global capital flows and import costs persist. The recovery underscores the central bank's role in balancing liquidity and currency stability amid volatile market conditions.

The RBI is expected to continue managing liquidity through market interventions, with close monitoring of benchmark bond yield trends to signal monetary policy shifts.

The RBI's intervention stabilized the rupee, but persistent external financing pressures and rising global capital costs remain critical risks. The bond yield spike highlights tightening monetary conditions, which could limit policy flexibility and require higher real yields than inflation alone would suggest.

Topics: Foreign Exchange, Currency Market, Central Bank Policy, Bond Yields, India Forex, Public Sector Banks, Monetary Policy, External Financing, Global Capital Costs, Currency Stability

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Source: ET Markets