RBI Steps Up Currency Market Intervention
The rupee staged a sharp recovery late last week, climbing above the 90-per-dollar mark after the RBI intensified its intervention through state-run banks. The domestic currency ended the week stronger at around 89.27 against the US dollar, marking a gain of over one percent.
Traders noted that aggressive dollar selling by public sector banks, widely seen as acting on behalf of the RBI, helped shore up the rupee. The unwinding of speculative positions betting against the currency further amplified the rebound.
Importers and Hedging Could Cap Further Gains
While the intervention has eased immediate pressure, dealers caution that the rupee’s upside may be limited. Importers are expected to step in to hedge dollar requirements at current levels, which could slow further appreciation.
Analysts believe the RBI’s actions have effectively lifted the rupee from recent record lows, but sustained gains will depend on the strength of capital inflows and broader global cues.
Bond Yields Track RBI Liquidity Signals
In the bond market, yields have remained range-bound as investors assess the RBI’s next moves. The benchmark 10-year government bond yield settled near 6.60 percent, slightly higher on the week, as traders weighed liquidity conditions and foreign investor activity.
Bonds have faced selling pressure since the RBI cut the repo rate by 25 basis points earlier this month. The reduction took cumulative rate cuts in 2025 to 125 basis points, the steepest easing cycle seen since 2019.
Is the Easing Cycle Nearing an End?
A growing section of the market believes the RBI may be close to the end of its rate-cutting cycle. With inflation risks still present and government borrowing set to rise toward the end of the fiscal year, traders are becoming cautious on long-duration bonds.
Concerns over heavy bond supply in the final quarter have also kept investors wary, despite relatively attractive yield levels.
Liquidity Infusion Offers Temporary Relief
To stabilise financial conditions, the RBI has injected significant liquidity into the system in recent weeks. The central bank infused nearly ₹1.45 trillion through government bond purchases and foreign exchange swaps, providing relief to tight money market conditions.
Market participants are now watching whether additional liquidity measures are announced before the end of December, especially as year-end funding pressures intensify.
Foreign Investors Remain Cautious
Foreign portfolio investors have continued to pare exposure to Indian debt, selling over ₹100 billion worth of index-linked bonds in the first three weeks of December. However, some fund managers believe higher yields and a stabilising rupee could eventually draw investors back.
Global asset managers view India as relatively attractive within emerging markets, citing stable growth prospects and favourable carry returns compared to peers.
Global Factors Add to Market Volatility
External factors are also influencing domestic markets. The US dollar index recently snapped a multi-week losing streak, while movements in the Japanese yen following policy signals from the Bank of Japan added to global currency volatility.
These developments underline the challenges faced by emerging market currencies like the rupee, even as domestic fundamentals remain resilient.
Outlook: Stability with Vigilance
Analysts expect the rupee to trade with a mild positive bias in the near term, supported by the RBI’s presence in the market. However, sustained stability will depend on global risk sentiment, foreign flows and domestic inflation trends.
Bond markets, meanwhile, are likely to remain sensitive to RBI liquidity cues and signals on future policy direction, making the coming weeks crucial for investors.
