Rupee Nears Record Low as RBI Intervenes with Dollar Sales

The Indian rupee neared a record low against the US dollar on Tuesday, briefly hitting 96.43 per dollar. Traders suggested that the Reserve Bank of India (RBI) intervened by selling dollars to stabilize the currency.

The rupee's decline reflects sustained pressure from foreign investors selling Indian stocks and bonds. The RBI faces a difficult choice: use its dollar reserves to support the currency now or preserve them for future needs. While some believe the RBI has been actively intervening, others argue it aims to conserve reserves and avoid expanding its large short foreign-exchange forward position, which stands at around $200 billion as of late August.

The RBI's policy decision, expected on Wednesday, is likely to include a quarter-point rate hike. Markets are watching whether higher rates and prior inflows can stabilize the rupee, even as caution persists in the forward market. One-year dollar-rupee forwards were trading around 99.70, while economists forecast the spot rate to reach 97.50 over the next year.

For businesses and investors, the high cost of hedging due to the RBI's forward position is a significant concern. The bank's spot market interventions, when combined with swaps, create future dollar obligations that impact hedging costs and budgeting exchange rates.