Under the impact of a strong US dollar, the Indian rupee is nearing its historical low, and the Reserve Bank of India may be forced to intervene.

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Against the backdrop of a strengthening US dollar globally, the Indian rupee is facing a severe test, with its exchange rate approaching a historic low.

On the 3rd, the exchange rate of the Indian rupee against the US dollar hovered around 88.7875, just one step away from the record low of 88.80 set in late September. Traders said that dollar selling interventions by the Reserve Bank of India helped prevent a steeper decline of the rupee.

The market generally believes this is intervention by the Reserve Bank of India. Multiple traders confirmed to the media that the central bank’s intervention aims to support the rupee. Currently, the rupee is not only being suppressed by a strong US dollar, but also faces continuous hedging demand from domestic importers.

The central bank's potential intervention adds uncertainty to the market. A banker in Mumbai said that at current levels, since both the risk of intervention and a broader depreciation trend coexist, it has become very difficult to judge the short-term direction of the rupee.

Double Pressure from a Strong Dollar and Importers’ Hedging

The main external factor behind the rupee’s recent pressure is the overall strength of the US dollar. On Monday, the US dollar index, which measures the dollar against a basket of major currencies, hovered near a three-month high. Affected by this, Asian currencies in general performed flat or weakened slightly, and the rupee was no exception.

At the same time, domestic pressure from India is also notable. Traders pointed out that Indian importers’ persistent dollar purchases, used to hedge their overseas procurement costs, have put steady downward pressure on the rupee.

In addition to short-term market factors, deeper policy headwinds have further increased depreciation expectations for the rupee. Since late August, when the US imposed high tariffs on Indian export goods, the rupee has been under continuous pressure.

Additionally, the hawkish stance revealed in the Fed’s policy outlook last week also impacted the rupee. This hawkish position changed the market’s expectations for US interest rates, pushing up the US dollar. At the same time, the expiry of positions in the non-deliverable forward forex (NDF) market spurred dollar demand, further weakening the rupee.

Market Eyes Fed Moves, Short-Term Outlook Under Pressure

Looking ahead, the market focus will be on speeches this week by several Fed policymakers, seeking more clues about the future direction of US benchmark interest rates. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the current market expectation for a Fed rate cut in December is about 70%, down from over 90% a week ago, reflecting a cooling in expectations for easing policies.

Amit Pabari, Managing Director of FX consultancy CR Forex, said:

“In the short term, due to the continued global strength of the dollar and the market waiting for substantial progress in the India-US trade agreement, the rupee may continue to be under mild pressure, fluctuating in the range of 88.50 to 89.10.”

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