Rupee Ends Higher as Dollar Supply Surges Ahead of RBI Deposit Window Closure

The Indian rupee ended higher on Friday, closing out the week with a modest gain against the US dollar, as a burst of dollar liquidity linked to the impending closure of a special Reserve Bank of India deposit window offset pressure from month-end importer demand.

According to currency traders, the rupee settled around 95.38-95.39 against the dollar, up roughly six paise to 0.2 percent from Thursday's close, after reversing early losses during the afternoon session. The currency had opened weaker as importers stepped up dollar purchases ahead of the month's end, a routine source of pressure on the rupee, but the move reversed sharply as deposit-related dollar inflows triggered stop-losses and an unwinding of bets against the currency.

What drove the reversal

The RBI's discounted non-resident dollar deposit scheme, which has drawn in more than $65 billion since it was introduced, is set to close on Monday, and bankers said the resulting rush of dollar inflows into the banking system in the final days of the window contributed meaningfully to the rupee's afternoon rebound. Market participants also pointed to positioning ahead of the MSCI index rebalancing due on August 31, with anticipated portfolio inflows tied to that event providing an additional tailwind for the currency, alongside some dollar-selling by state-run banks.

A separate factor cited by analysts was a fall in global crude oil prices during the session, which eased some of the inflationary pressure that a weaker rupee combined with expensive oil can create for an economy that imports the vast majority of its energy needs. The Reserve Bank was also seen intervening in the market to smooth volatility, consistent with its typical approach of limiting sharp swings in either direction.

Foreign flows remain a headwind

Even as the rupee gained on the day, foreign institutional investors continued to sell Indian equities, offloading shares worth roughly Rs 298 crore on a net basis in the prior session, a reminder that portfolio outflows remain a persistent drag on the currency even during periods of technical support from other flows. Traders said the rupee's broader trajectory in the coming sessions will depend heavily on US Federal Reserve chair Kevin Warsh's closely watched speech at the Jackson Hole symposium, with markets looking for signals on the future path of US interest rates.

Why it matters

A stronger rupee, even a modest one, offers some relief to importers and helps contain imported inflation at a time when Indian bond yields have already been under upward pressure following hawkish signals from the RBI's own policy committee about the possibility of future rate hikes. For an economy heavily dependent on energy imports, the interplay between crude oil prices, dollar liquidity conditions and global central bank signals will continue to be the key variables determining whether the rupee can sustain this week's modest gains or come under renewed pressure once the current dollar deposit window closes on Monday.

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