Rupee edges lower to 96.05 against dollar: What is driving the move

The Indian rupee opened back above the ₹96-per-dollar mark on Tuesday (September 29), weighed down by higher US yields and elevated oil prices. The rupee opened at ₹96.05 against the US dollar, compared with Monday’s (September 28's) close of ₹95.98, marking a 7-paise decline.

The ₹96-per-dollar level is being closely watched as an important near-term support level. Market participants expect the Reserve Bank of India (RBI) to remain active in the currency market if the rupee comes under further pressure.

“The RBI intervention is a given at this point. The real question is whether it is going to keep defending levels, or simply smooth the move and let the rupee adjust more,” a currency trader at a bank said.

What is putting pressure on the rupee?

Higher US yields: US Treasury yields rose on Monday (September 28) as the surge in oil prices raised concerns that inflation could remain sticky. The 10-year US Treasury yield climbed 6 basis points to 5.24%, hovering near a nearly two-decade high. Higher US yields can add pressure on emerging-market currencies by making dollar assets more attractive.

Oil prices: Crude oil prices rose on Tuesday (September 29) amid concerns over prolonged supply disruptions in the West Asia. Persistently high oil prices have been weighing on the rupee.

Hawkish Fed expectations: The dollar index is trading near a two-month high, while markets now see a nearly 70% probability of another US Federal Reserve rate hike in October, up from less than 20% a month ago.

RBI intervention in focus

The RBI may be reluctant to allow the rupee to move beyond the psychologically important ₹96-per-dollar level and could intensify its intervention, market participants said. The central bank has been a near-daily presence in the currency market in recent weeks.

Analysts have also pointed to greater room for RBI intervention following a recent build-up in foreign exchange reserves from inflows linked to special measures introduced by the central bank.

The RBI's broader liquidity operations are also in focus. The central bank has net sold bonds worth ₹1 lakh crore so far this financial year, its biggest annual net bond sale in more than a decade, according to treasury officials. The move is aimed at withdrawing excess liquidity from the banking system after a special window allowed lenders to raise dollars.

For the rupee, however, the immediate focus remains on the ₹96-per-dollar level, with oil prices, US yields, Fed expectations and RBI intervention likely to influence its next move.

-With Reuters inputs