The Indian rupee declined to its weakest level in more than two months on Tuesday under pressure from persistent foreign selling of local assets, drawing likely central bank intervention as the South Asian unit nears a record low.
The rupee declined 0.15% to 96.43 per dollar, its weakest level since July, before paring losses slightly. The currency hit a record low of 96.96 in May.
Traders reckon that the central bank, despite its almost daily interventions through dollar sales that helped anchor the local currency, is unlikely to fight the tide indefinitely.
"While the FX intervention response has been strong, the central bank will prefer to time dollar sales to rationalise the use of the reserves buffer and prevent widening the ballooned short FX forward book," DBS said in a note.
One-off policy measures have helped boost India's FX reserves by drawing over $140 billion in capital inflows. Absorbed via swaps by the central bank, the inflows show up as a forward liability and contributed to expanding the net size to about $200 billion by the end of August.
The focus is also on the central bank's policy decision due on Wednesday, where a 25 basis point hike is widely anticipated.
Analysts More Bullish Than Forwards
The inflow haul is expected to help keep the rupee steady, with economists and analysts polled by Reuters anticipating only a modest decline to 97.50 over the next 12 months.
Forward markets, meanwhile, are more visibly bearish on the unit, with the 1-year outright forward quoting around 99.70 on Tuesday.
None of the polled analysts expected the rupee to pass the psychologically key 100-a-dollar mark over the next year, with BofA, UOB and Barclays forecasting it at 99 per dollar by end-September 2027.
