Forex traders said strong dollar demand from corporates, importers and foreign portfolio investors put pressure on the rupee, pushing the currency weaker against the greenback and increasing volatility in currency markets.
Why the rupee came under pressure
- Corporate dollar needs: Companies buying raw materials and components from abroad often need dollars to settle invoices, raising demand in spot and forward markets.
- Importers: Heavy import bills—particularly for energy and capital goods—boost dollar buying, stretching supply in the domestic market.
- Foreign portfolio investors (FPIs): When FPIs sell local assets or repatriate capital, they convert rupees into dollars, adding to selling pressure on the currency.
- Global dollar strength: A stronger US dollar driven by international macro moves or higher US yields can amplify local currency weakness.
Market impact and immediate effects
Higher dollar demand typically leads to a softer rupee, which can increase costs for importers and feed into inflation if businesses pass on higher input costs to consumers. It also raises uncertainty for exporters and companies with foreign-currency borrowings.
Short-term consequences
- Increased currency volatility and wider bid-ask spreads.
- Potential intervention by the central bank to smooth excessive moves or use reserves to curb sharp declines.
- Greater focus on hedging by businesses to manage FX risk.
What to watch next
Market participants will be tracking several indicators to gauge the rupee’s direction:
- Foreign portfolio flows and corporate dollar demand levels.
- Global cues, including US interest-rate signals and dollar momentum.
- Crude oil prices, which affect the country’s import bill.
- Central bank commentary or intervention in the foreign exchange market.
For businesses and consumers, the near-term outlook looks cautious. Companies exposed to imports or foreign debt should consider active hedging strategies, while policymakers are likely to monitor inflows and intervene if currency moves threaten financial stability.