The rupee recouped losses early on Friday, after closing at its all-time low of 78.32 against the dollar in the previous two sessions.
That pullback was primarily driven by a slide in commodities prices which offered a salve for inflation fears and the resultant aggressive policy tightening.
At the interbank foreign exchange, the rupee opened at 78.20 against the dollar. In early trade, the currency ranged from 78.19 to a low of 78.24.
The rupee had closed at its record low of 78.32 against the dollar, on Thursday and on Wednesday.
“Rupee to trade in a range of 78 to 78.40 as foreign portfolio investors (FPI) continue to buy US dollar, along with oil companies while the Reserve Bank of India continues to sell and protect the rupee,” Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors, told PTI.
With a wide range of industrial and construction uses, copper is a leading indicator of economic activity. Copper fell 3 per cent in Shanghai and is down more than 7 per cent for the week, marking its biggest weekly decline since the pandemic-driven collapse of the financial markets in March 2020.
Benchmark grain prices dropped, with Chicago wheat down nearly 9 per cent for the week and at its lowest since March at $9.42 a bushel. Oil prices also dropped overnight, and Brent crude futures are down 2 per cent on the week to below $110 a barrel.
“While market worries about an abrupt slowdown are the culprit behind recent moves lower in raw materials prices, lower commodity prices do feel like they could be just what the doctor ordered for the global economy,” NatWest markets strategist Brian Daingerfield told Reuters.
“So much of our hard landing fears relate to concerns that link back to commodity prices.”
But the rupee’s relief from life lows may be short lived.
A Reuters report on Thursday showed a shortage of cash dollars and forward market intervention by the Reserve Bank of India has pushed onshore 1-year forward premiums to their lowest levels in more than a decade could pressure the rupee to new lows.
“The situation is really bad. There is dollar scarcity which is getting compounded by RBI taking delivery of maturing forward contracts,” the head of forex trading at a private bank said
Carry transactions are probably less appealing to foreign investors due to the decreased forward premia, and dealers warned that the unwinding of these carry trades would further devalue the spot rupee and drive it below 79-80 levels.
If the situation worsens, the trader warned that premia could drop even more and that a sell/buy swap window might be required.
“The RBI is doing a lot of buy/sell swaps to prevent showing a fall in spot foreign exchange reserves I guess. This is amplifying the signal from the interest rate spread between India and the U.S.,” said Vivek Kumar, economist at QuantEco Research.
Up until last year, when the RBI intervened to stop the unsustainable appreciation of the rupee, it bought ahead dollars to stop an influx of rupee liquidity into the spot market.