The Indian rupee closed at 88.69 against the U.S. dollar, gaining 0.10% in its strongest performance in two weeks. This positive movement came as the Reserve Bank of India (RBI) kept policy rates unchanged while signaling potential rate cuts as it evaluates impacts of domestic tax cuts and U.S. tariffs.

RBI Intervention and Currency Market Dynamics

The central bank likely intervened to support the currency, with state-run banks spotted offering dollars early in the session. This intervention came just hours before the RBI's anticipated policy decision, as the rupee had opened near its record low of 88.80 reached on Tuesday.

The dollar index fell 0.20% to 97.60 amid a U.S. government shutdown, contributing to the rupee's relative strength.

Stock Market Response

India's BSE Sensex and Nifty 50 both rose 0.90%, driven by banking stocks after the RBI announced measures to boost bank lending to capital markets and large corporates.

New Measures to Boost Rupee's International Usage

The RBI introduced several measures aimed at increasing the global use of the Indian rupee:

1. Allowing Indian banks to provide rupee-denominated loans to businesses in Bhutan, Nepal, and Sri Lanka for cross-border trade transactions.
2. Establishing transparent reference rates for currencies of India's major trading partners to facilitate rupee-based transactions.
3. Permitting foreign entities to invest surplus rupee balances in their vostro accounts into corporate bonds and commercial papers, expanding beyond the previously allowed central government securities.

Governor Sanjay Malhotra stated that the bank has been making steady progress on rupee internationalization.

Future Outlook

ANZ analysts project gradual rupee depreciation over the medium term. The RBI's multifaceted approach, including currency market intervention, new internationalization measures, and policy decisions, underscores its commitment to maintaining stability in the currency markets while promoting the rupee's global role.

As these developments unfold, their implications for India's currency and economy will be closely monitored by market observers and economists alike.

Foreign portfolio investors have scaled back their purchases of Indian bonds in September, primarily due to the weakness of the Indian rupee. The currency, which has been the worst performer in Asia this year, plummeted to an unprecedented low of 88.80 against the US dollar on September 23, driven by concerns over higher US tariffs.

Declining Bond Inflows

The impact of the weakening rupee is evident in the reduced foreign investment in Indian government securities. Net inflows through the fully accessible route for government securities saw a significant drop, falling to ₹6,665.00 crore in September from ₹10,470.00 crore in August. This decline underscores the cautious approach adopted by foreign investors, as the weakening rupee erodes their returns on Indian bonds.

Rupee Performance and Global Factors

The Indian rupee's poor performance can be attributed to various global factors, including:

• Concerns over higher US tariffs
• Global economic uncertainties
• Strengthening of the US dollar

These factors have collectively contributed to making the rupee the worst-performing currency in Asia this year.

India's Position in Asian Markets

In the broader Asian context, India has underperformed in attracting foreign inflows. The current global economic climate has seen more capital flows directed towards China, as investors seek safer havens amidst prevailing uncertainties.

Factors Supporting Bond Purchases

Despite the overall decline, some bond buying activity was observed, supported by:

1. Positioning ahead of the Reserve Bank of India's monetary policy decision
2. Brief periods of dollar weakness before the US Federal Reserve meeting

Potential Inclusion in Global Index

Bloomberg Index Services has sought views on including Indian government bonds in its global index. This development could potentially boost future foreign investment in Indian bonds. However, it's important to note that any decision on this front would take at least a year to implement.

Outlook

The current scenario presents a complex picture for India's bond market. While the weakening rupee has deterred some foreign investors, the potential inclusion in global indices could open up new avenues for investment in the future. As global economic conditions continue to evolve, the performance of the Indian rupee and its impact on foreign bond purchases will remain a key area of focus for investors and policymakers alike.