RBI Scrambles as Rupee Nears 96 Per Dollar

India's rupee is on the verge of hitting 96 per US dollar, prompting the Reserve Bank of India (RBI) to take action. The currency pair USD/INR closed at 95.9825 on Monday and traders expect a 95.99-96.02 open, putting it at a psychologically sensitive level.

The rupee's slide is being driven by higher US bond yields and firm oil prices, which are lifting the dollar and increasing demand for dollars. The RBI has been selling dollars in the spot market to slow the rupee's decline, but its goal is nuanced: rather than 'defending' a specific number, it aims to 'smooth the move', preventing sharp jumps while allowing the currency to weaken.

This approach can have unintended consequences, such as draining rupee cash from the banking system and tightening very short-term funding conditions. Forward pricing may also be affected, with banks and corporates needing rupees to fund hedges and meet dollar demand.