The rupee on Monday logged its best single-day gain since April 2, rallying 96 paise, or more than 1%, to close at 95.75 against the US dollar, after the Reserve Bank of India (RBI) announced a slew of measures over the weekend to curb volatility in the foreign exchange market. However, the measures triggered a sell-off in government bonds, pushing the benchmark 10-year yield close to 7.4%, its highest level since March 2023.
The rupee had gained 1.8% on April 2 after the RBI announced similar measures a day earlier. Since then, however, the currency has lost more than 7.5% from its levels at the time, remaining down over 6.5% this year. The currency has now been under sustained pressure for three consecutive years.
The benchmark 10-year government bond yield, which closed at 7.2995% on Friday, rose to 7.35% at the open on Monday and climbed further to 7.36-7.38%, up around 7 basis points, amid concerns over the RBI's policy stance and the impact of its liquidity measures.
The yield has risen around 45 basis points over the past seven weeks, reflecting elevated crude oil prices and uncertainty over the interest-rate outlook. The 10-year yield last traded at comparable levels during the previous monetary tightening cycle, touching 7.46% in late February and early March 2023. It last closed at around 7.35% on March 21, 2023. In November 2022, yields also traded in the 7.37-7.44% range as markets adjusted to RBI rate hikes.
Elevated Brent crude prices, which have remained above $105 a barrel, hawkish central bank policies and heavy upcoming domestic and international debt supply have added to risk aversion in the fixed-income market.
Forex traders said the RBI's measures could provide near-term support to the rupee by easing spot-market dollar demand and curbing excessive speculative positions. However, a sustained recovery will depend on crude prices, capital flows and broader global market conditions.
The rupee opened 91 paise higher at 95.80 against the dollar in early trade after the RBI announced measures on Saturday to contain volatility in the foreign exchange market.
The measures include a dedicated dollar window for oil marketing companies through designated banks and higher costs for certain foreign exchange hedging transactions, aimed at reducing dollar demand in the spot market and curbing speculative positions.
Forex analysts said the measures could help the rupee withstand pressure from elevated crude prices and a strong dollar, but cautioned that the gains may prove temporary.
American brokerage Citi said in a note that while the measures would provide immediate support to the rupee, the currency would remain under pressure beyond the initial impact. French brokerage Societe Generale said the rupee's trajectory would continue to be shaped by crude oil prices, foreign portfolio flows and the broader direction of the dollar.
The dedicated oil window is expected to divert around $10-12 billion of monthly dollar demand away from the spot market, based on government data on oil imports.
"Unless BoP pressures ease more broadly, gradual rupee depreciation is likely to resume once their initial impact fades," analysts at ANZ said. The brokerage retained its medium-term depreciation outlook for the rupee and said it would reassess its projections after reviewing hedging activity and foreign exchange reserve data in the coming weeks.
Dilip Parmar, senior research analyst at HDFC Securities, told TNIE that the rupee emerged as the strongest-performing Asian currency on Monday, supported by the RBI's targeted measures to curb speculation and contain volatility in the foreign exchange market.
In the near term, the spot rupee may move towards 95.30 against the dollar, Parmar said, adding that the broader medium- to long-term trend would depend on dollar flows, the trade balance, interest-rate differentials and evolving geopolitical developments.