The Indian rupee weakened against the US dollar on Wednesday, closing 16 paise lower at 89.79 despite showing initial strength during early trading hours. The currency's decline came amid persistent foreign capital outflows and strong demand for the greenback from bullion importers.

Trading Session Performance

The rupee's trading session revealed significant volatility throughout the day. The currency opened at 89.56 against the US dollar and reached an intraday high of 89.51, representing a 12-paise gain from the previous close. However, these early gains were completely erased by the session's end.

Market Drivers and Analysis

Dilip Parmar, Senior Research Analyst at HDFC Securities, attributed the rupee's decline to a shift toward risk aversion. The primary factors driving this weakness included persistent capital withdrawals from foreign investors leading up to the holiday break and heightened greenback demand from bullion importers.

Despite the Reserve Bank of India's announcement of USDINR swaps and Open Market Operations, these measures failed to ignite market enthusiasm. Parmar noted that the interventions "did little to bridge the widening gap between dollar supply and demand ahead of year-end."

Technical Outlook and Global Factors

The outlook for spot USDINR maintains an upward trajectory, provided it holds above the 89.00 mark. However, the 90.30 level continues to act as formidable resistance for further gains, according to market analysts.

Global market conditions also influenced the rupee's performance:

• Dollar Index: Trading 0.13% lower at 97.81
• Brent Crude: Trading 0.22% higher at $62.52 per barrel
• Sensex: Declined 116.14 points to 85,408.70
• Nifty: Dropped 35.05 points to 26,142.10

RBI Intervention Measures

The Reserve Bank of India announced significant liquidity injection measures on Tuesday. The central bank will purchase government securities worth ₹2 lakh crore and conduct a $10 billion buy/sell dollar-rupee swap auction to inject liquidity into the banking system.

This latest announcement follows recent measures where the RBI conducted ₹1 lakh crore OMO purchase auctions of Government of India securities and a $5 billion USD/INR Buy/Sell Swap auction for a three-year tenor.

Foreign Investment Flows

Foreign Institutional Investors continued their selling pressure on Indian markets, offloading equities worth ₹1,794.80 crore on Tuesday, according to exchange data. This persistent outflow has been a key factor contributing to the rupee's weakness and broader market volatility.

The Indian rupee gained momentum in early trade, appreciating 12 paise to reach 89.51 against the US dollar. This strengthening came as a result of the Reserve Bank of India's major liquidity announcement and continued weakness in the American currency in overseas markets.

Currency Performance and Market Opening

At the interbank foreign exchange market, the rupee demonstrated resilience by opening at 89.56 against the US dollar before gaining ground to touch 89.51. The currency also briefly touched 89.65 during initial trade, showing some volatility before settling at stronger levels.

RBI's Liquidity Support Measures

Forex traders attributed the rupee's stronger performance to the RBI's announcement of sufficient liquidity support for markets to the extent of approximately ₹3 lakh crore. This substantial liquidity injection is expected to allow the central bank to maintain better control over rupee weakness and manage currency volatility effectively.

The Reserve Bank of India announced that it would purchase government securities worth ₹2 lakh crore and conduct a $10 billion buy/sell dollar-rupee swap auction to inject liquidity into the banking system. This latest announcement follows previous measures including ₹1 lakh crore OMO purchase auctions of Government of India securities and a $5 billion dollar/rupee buy/sell swap auction for a three-year tenor.

Market Analysis and Expert Commentary

According to Anil Kumar Bhansali, Head of Treasury and Executive Director at Finrex Treasury Advisors LLP, the dollar index softened after strong GDP growth of 4.30%, and with Asian currencies generally stronger, the rupee managed to recover lost ground. Bhansali noted that the rupee is likely to remain broadly in the 89-90 range while the RBI protects both sides as it attempts to reduce its short dollar positions.

The RBI's active market intervention strategy involves preventing excessive volatility and keeping the USD/INR pair from breaking the 90 level, while simultaneously purchasing dollars from the spot market to prevent excessive appreciation.

Global Market Indicators

The dollar index, which measures the greenback's strength against a basket of six currencies, was trading 0.07% lower at 97.87, contributing to the rupee's relative strength. Brent crude, the global oil benchmark, was trading marginally higher by 0.02% at $62.39 per barrel in futures trade.

Domestic Equity Market Performance

Domestic equity markets showed positive momentum alongside the currency's strength. The 30-share benchmark Sensex rose 63.82 points to 85,588.66, while the Nifty gained 32.80 points to 26,209.95. However, Foreign Institutional Investors continued their selling trend, offloading equities worth ₹1,794.80 crore, according to exchange data.

Outlook and Central Bank Strategy

The RBI's comprehensive approach to currency management involves active intervention on both sides of the market to maintain stability. The central bank's strategy focuses on preventing excessive volatility while managing its dollar positions effectively, with the currency expected to trade within the 89-90 range in the near term.