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Indian Rupee Weakens Amidst Dollar Demand from Foreign Banks

The Indian rupee fell on Wednesday, mostly due to rising dollar demand from big overseas banks.

The Indian rupee faced downward pressure on Wednesday, primarily driven by increased dollar demand from major foreign banks. 

While most Asian currencies experienced marginal gains, the South Asian currency weakened slightly, trading at 83.2475 against the US dollar (22.68 against UAE dirham) as of 9 am UAE time. 

This marked a 0.07% decrease from its previous closing rate of 83.1925 (22.67).

Factors Influencing the Rupee Movement:

The dollar index remained relatively stable at 101.5 during Asian trading hours but continued to linger near its lowest level since late July. 

The rupee’s dip was attributed to heightened dollar demand from significant foreign banks, potentially acting on behalf of custodian clients, as noted by a foreign exchange trader at a state-run bank.

Market analysts anticipate that merchant flows will drive the rupee’s price action, with speculative activity remaining subdued as the year-end approaches. 

Despite the holiday season contributing to muted volatility, experts predict the intraday range for the rupee to be confined to 10-15 paisa, according to Amit Pabari, Managing Director at CR Forex, an fx advisory firm.

Economic Indicators and Balance of Payments:

India’s current account deficit showed a more significant decline than expected in the July-September quarter, dropping to $8.3 billion, 1% of GDP, compared to $9.2 billion (1.1% of GDP) in the previous quarter. 

The result surpassed the median forecast of $9 billion in a Reuters poll of 18 economists. Barclays noted that, despite the capital account surplus barely exceeding the current account deficit, the overall balance of payments remained in a small surplus, with expectations for further improvement.

Forward Premiums and Market Sentiment:

Rupee forward premiums experienced a slight increase, with the 1-year implied yield reaching 1.78%, its highest level in over two months. 

This uptick in forward premiums is linked to growing speculation that the US central bank may initiate policy rate easing soon. 

Investors are pricing in a high probability of a rate cut in March, influencing the forward premium dynamics.

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