Central bank moves fail to calm forex market as dollar demand and oil prices rise
Forex traders say recent central bank steps — offering USD/INR swaps and conducting Open Market Operations (OMOs) — did little to lift market sentiment. Despite these interventions, the rupee remained under pressure as strong dollar demand and rising crude oil prices continued to shape market behaviour.
What the central bank did
The central bank announced a set of measures aimed at easing dollar shortages and supporting the currency. Key actions included:
- USD/INR swaps: Short-term swap facilities to provide banks with dollars in exchange for rupees, intended to meet immediate import and settlement needs.
- Open Market Operations (OMOs): Sales or purchases of government securities to manage liquidity and influence short-term interest rates.
These tools are commonly used to stabilise markets and ensure liquidity, but their success depends on the scale of demand and underlying economic pressures.
Why the measures did not boost sentiment
Traders point to two main reasons the interventions fell short:
- Persistent dollar demand: Importers, especially those buying crude oil and other commodities priced in dollars, continue to need large amounts of foreign currency. Corporates and banks seeking to hedge or settle international obligations have kept demand high, limiting the effectiveness of short-term swap lines.
- Rising crude oil prices: Higher oil prices raise the value of imports, widening the trade deficit and increasing pressure on the rupee. When import bills rise, the market needs more dollars, offsetting central bank support.
In short, the interventions provided some immediate liquidity but were not large enough to change the broader market narrative driven by global dollar strength and commodity trends.
Market reactions and indicators
Following the announcement, traders reported only muted support for the rupee. Key signals included:
- Limited narrowing in intraday volatility despite swap availability.
- Continued demand for dollar forwards and higher premiums in the FX forwards market.
- Bond yields and short-term rates showing signs of stress in certain pockets, as liquidity adjustments play out.
These indicators suggest market participants remain cautious and expect further volatility unless demand eases or more decisive measures are introduced.
What traders are watching next
Forex desks and corporate treasuries are closely watching several factors that could alter the outlook:
- Crude oil trajectory: Any sustained drop in oil prices would ease import pressures and reduce dollar demand.
- Global dollar strength: Dollar appreciation versus other currencies can fuel capital outflows and put more pressure on emerging market currencies.
- Scale and timing of central bank support: Traders will look for larger or repeated swap operations, additional OMOs, or other policy tools aimed at stabilising the currency and ensuring adequate FX reserves.
- Macro data: Trade figures, foreign inflows into bonds and equities, and inflation readings will influence both sentiment and policy response.
Outlook — cautious and conditional
For now, the market tone remains cautious. Short-term support from swap lines helps meet urgent dollar needs, but without a meaningful easing of oil prices or a reduction in dollar demand, the rupee could continue to face pressure. Traders expect the central bank to remain vigilant and possibly take further action if the situation deteriorates.
Investors and corporates are likely to stay hedged and keep a close eye on global commodity markets and capital flow trends. In the near term, sentiment will hinge on whether central bank measures are scaled up and whether international conditions — especially oil prices and dollar momentum — begin to ease.
Bottom line
The central bank’s tools provided temporary relief but did not resolve the underlying drivers of currency stress. Strong dollar demand, amplified by rising crude oil prices, has sustained pressure on the rupee, leaving traders and policymakers facing a delicate balancing act between liquidity management and longer-term stabilisation.