Rupee Weakens Amid Corporate Dollar Demand

The Indian rupee experienced a modest weakening on Wednesday, closing at 89.7850 per U.S. dollar. This depreciation was primarily driven by demand for dollars from local corporations and positions maturing in the non-deliverable forward market, overshadowing positive trends in most regional currencies. Despite these pressures, the rupee has shown resilience, bouncing back from record lows seen last week.

The Reserve Bank of India has initiated measures to bolster liquidity, announcing a three-year, $10 billion FX swap for the upcoming month. This action is anticipated to inject approximately $32 billion into the banking system, which market participants foresee as a catalyst for a sustained decrease in government bond yields. Reflecting this, India's 10-year bond yield saw a notable decline of 8 basis points, settling at 6.55%.

Analysts suggest these combined actions, including open market bond purchases and the FX swap, are designed to stabilize money markets, manage rupee liquidity without signaling currency policy shifts, and ensure the effective transmission of monetary policy. Elsewhere, the U.S. dollar is poised for its worst annual performance in over two decades as market expectations point towards further Federal Reserve rate cuts in the coming year.