Rupee in Headwinds: Subtle Weakness Despite Stable Dollar Situation

The Indian rupee experienced a slight weakening on Monday amid the backdrop of weakening regional currencies. Simultaneously, the dollar-rupee overnight swap rate surged due to cash inflows in dollars and tight rupee liquidity, driving the implicit yield of the rupee on overnight swaps over the 10% mark. In the morning, the rupee was quoted at 84.8250, marking a slight decline of 0.04% compared to the closing rate on Friday at 84.7875. Asian currencies overall appeared rather weak, with the offshore yuan losing 0.1% in value following disappointing retail sales data from China. In contrast, the dollar index remained largely stable at 106.8 points. The increase in the overnight swap rate continued with a rise to 1.20 paisa. A key driver was a combination of fresh cash inflows in dollars and the tight liquidity in rupees, in the wake of recent spot dollar sales by the Reserve Bank of India, experts explained. Moreover, the far-forward dollar-rupee premiums declined, with the one-year implied yield falling by 2 basis points to 2.16%. This was weighed down by rising U.S. bond yields as markets awaited the upcoming interest rate decision by the Federal Reserve. The one-year yield for U.S. Treasury notes increased by 4 basis points to 4.28%. According to the CME FedWatch Tool, the probability that the Fed might cut rates by 25 basis points is currently at 95%. "The dollar is currently defying the seasonal trends toward weakness in December, and we doubt that the FOMC presents a negative surprise risk," remarked ING Bank.