The rupee edged towards a sharp low as the central bank escalated its defence of the currency amid growing external headwinds. The domestic currency traded around 88.80 to the U. S. dollar, nearing its record low despite official efforts to stem the slide.

The Reserve Bank of India expanded its short-dollar forward positions by about US$6 billion in September, bringing the total to roughly US$59.4 billion, signalling increased dollar sales to defend the rupee.
The rupee had already recorded five straight months of decline before stabilising briefly in October, only to come under renewed pressure. Analysts point to surging gold imports, foreign-portfolio investor withdrawals and uncertainty around U. S. tariffs as key drivers of dollar outflows.

Market participants note that the rupee's ability to hold above the 88.80 mark depends heavily on the central bank's resolve. One currency strategist at the Australia and New Zealand Banking Group remarked that the central bank may not allow a significant breach of the 89-per-dollar level unless India's economic fundamentals deteriorate further.

The rupee's slide contrasts with other emerging-Asian peers, most of which posted gains of over 3 per cent this year while India's currency was down about 3.6 per cent. Importer demand for dollars and robust non-deliverable-forward flows remain persistent drags. The central bank made small daily interventions via state-run banks, but these were smaller in scale than the large dollar sales seen in the prior month.

In one high-impact intervention, the Reserve Bank of India sold between US$3 billion to US$5 billion across spot and offshore markets, according to trade-desk estimates. That move pushed the rupee up by nearly 1 per cent on the day, its largest single-day gain in four months. The central bank has declined to comment publicly on the precise quantum of intervention.

The central bank is also placing a premium on managing volatility. Despite the dollar's global strength and broader weakness in Asian currencies, the rupee has been constrained to a narrow trading band around the 88.80 level. Its ten-day realised volatility has fallen beneath 2 per cent and implied volatilities through one month are near their yearly lows. Some market participants caution that this subdued volatility could undermine hedging activity and leave firms vulnerable if a shock hits.

The rupee's vulnerability arises in part because the U. S. dollar remains elevated, and the Federal Reserve has signalled that it does not expect to cut interest rates as soon as markets hoped, strengthening the greenback and reducing relief for the rupee. At the same time, India's trade position remains under pressure as high gold-import volumes and elevated oil prices increase dollar demand.

Against this backdrop, India's sovereign-bond market is showing signs of life. Foreign investors have ramped up purchases of long-dated government debt following the central bank's display of defensive resolve. Some analysts suggest that migration back into Indian bonds reflects renewed confidence in rupee-denominated assets. Yet this hope is tempered by the possibility that tighter liquidity-stemming in part from currency-market interventions-could weigh on bond markets and corporate funding costs.

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