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INR: Lower Offshore Borrowing Rates Evidence of Caution Over Liquidity Issues

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As a likely consequence of the RBI’s heavy rounds of intervention last week, short-end offshore borrowing rates spiked higher, highlighting a shortfall in rupee liquidity/excess dollar liquidity. But the RBI’s attentiveness to liquidity issues has since seen USD/INR 1-month forward premiums decline for 5 consecutive sessions.

  • Bloomberg reported late last week that the RBI would aim to support the rupee without draining liquidity from banks by dialling down bets in the NDF market and instead conducting more forward operations in the local market. Meanwhile a survey of market participants released today shows that investors expect the central bank to ramp up their purchases of bonds to enhance INR liquidity.
  • A confluence of negative factors (RBI easing, US tariff threats, local equity outflows) have weighed on rupee sentiment in recent weeks, prompting authorities to intervene heavily to avoid steeper losses, despite expectations that the RBI under the new leadership of Governor Malhotra would be more tolerant of a weaker rupee.
  • Nonetheless, on an intraday basis, the onshore rupee ended the session as one of the top performers across the Asia-ex Japan space, with a slightly softer greenback providing a tailwind for regional currencies. For the rupee in particular, Reuters note that strong dollar sales from foreign banks aided gains throughout Thursday’s session.
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As a likely consequence of the RBI’s heavy rounds of intervention last week, short-end offshore borrowing rates spiked higher, highlighting a shortfall in rupee liquidity/excess dollar liquidity. But the RBI’s attentiveness to liquidity issues has since seen USD/INR 1-month forward premiums decline for 5 consecutive sessions.

  • Bloomberg reported late last week that the RBI would aim to support the rupee without draining liquidity from banks by dialling down bets in the NDF market and instead conducting more forward operations in the local market. Meanwhile a survey of market participants released today shows that investors expect the central bank to ramp up their purchases of bonds to enhance INR liquidity.
  • A confluence of negative factors (RBI easing, US tariff threats, local equity outflows) have weighed on rupee sentiment in recent weeks, prompting authorities to intervene heavily to avoid steeper losses, despite expectations that the RBI under the new leadership of Governor Malhotra would be more tolerant of a weaker rupee.
  • Nonetheless, on an intraday basis, the onshore rupee ended the session as one of the top performers across the Asia-ex Japan space, with a slightly softer greenback providing a tailwind for regional currencies. For the rupee in particular, Reuters note that strong dollar sales from foreign banks aided gains throughout Thursday’s session.