The Indian rupee bucked the weakness seen in most Asian peers on Wednesday as likely central bank intervention shielded the currency from a stronger dollar that rose as traders positioned for potential Federal Reserve rate hikes.
The currency ended the day at 94.6650 against the U.S. dollar, marginally stronger than its close at 94.7350 on Tuesday.
While the rupee endured losses in early trading, dollar sales by state-run banks, most likely on behalf of the Reserve Bank of India, helped support the currency.
Asian currencies were mostly weaker, with the Korean won down nearly 1% and leading losses in the region. Regional currencies were under pressure even as Brent oil prices slid to $75.60, the weakest since February 27, a day before initial U.S.-Israeli strikes on Iran.
RATE EXPECTATIONS
While the risks from energy supply disruptions have eased, a hawkish repricing of U.S. rate expectations continues to weigh on risk assets.
The dollar index was up 0.2% at 101.6 on Wednesday, hovering around its strongest level in 13 months.
"We remain very cautious about picking a top in this USD move. We still don't think this is the start of a new bullish USD cycle, but near-term momentum remains bullish," ING analysts said in a note.
Hawkish Fed expectations combined with the Indian central bank chief's remark that it's "premature" to talk about rate hikes knocked down dollar-rupee forward premiums on Wednesday.
The 1-year dollar-rupee forward implied yield eased 9 bps to 2.83%, tracking a similar sized move in the 1-year overnight index swap rate, which fell to 5.74%, its lowest since March 12.
RBI Chief Sanjay Malhotra said in an interview that the central bank was watching for second-round effects of higher oil prices on inflation in the broader economy before taking a call on rates.
On the currency, Malhotra reiterated that the RBI does not target any level for the rupee and instead intervenes only to curb disorderly moves in the FX market.
