Mumbai : Rupee weakened past the 95 mark against the US dollar for the first time on Monday, hitting a record low despite recent steps taken by the Reserve Bank of India (RBI). The RBI’s move to tighten limits on banks’ foreign exchange positions offered only brief support to the rupee, with analysts saying that underlying factors remain unfavourable for the currency.
The RBI directed banks to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day. Banks have been asked to comply with this rule by April 10. Banks are expected to sell dollars in the domestic market as they unwind existing arbitrage trades.
The spread between the onshore and NDF markets had widened sharply in recent weeks due to rising volatility, driven by risk aversion and higher oil prices linked to the Iran war. The size of these arbitrage positions is estimated to be between $25 billion and $50 billion. Higher crude oil prices increase India’s import bill and widen the current account deficit, which puts pressure on the rupee.
The weakness in the rupee comes alongside a sharp fall in equity markets. The Nifty 50 was down around 2% on Monday and is on track for its worst monthly decline since March 2020. The combined impact of a falling currency, rising oil prices, and global uncertainty has kept overall market sentiment weak.
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