Currency slips from four-day bull run, bond rates increase
Headline: Rupee Stays Soft Amid Trade Uncertainty, but Analysts Predict Appreciation Post Trade Deal
The Indian currency, INR, experienced a setback on Thursday, snapping a four-day winning streak, as it closed at 88.1275 per US dollar (USD). This depreciation comes amidst a dollar rebound following the US Federal Reserve's (Fed) 25 basis point rate cut, which strengthened the greenback.
According to Dilip Parmar, Senior Research Analyst at HDFC Securities, the rupee mirrors the weakness in regional currencies in this context. He also noted that the rupee's trend remains soft, with its depreciation currently serving as a growth stabiliser rather than a deterrent to rate easing.
Despite the current soft trend, there are signs of potential appreciation for the rupee. Anindya Banerjee, Head of Currency & Commodity Research at Kotak Securities, believes that once a trade deal is signed, we could see some appreciation in the rupee. In the near term, he expects USDINR to consolidate within a 87.70-88.70 range on spot.
In a related development, the Reserve Bank of India (RBI) conducted a six-day Variable Rate Repo (VRR) auction amounting to Rs 1 lakh crore on Friday. Bids totaled Rs 59,967 crore against the notified amount, indicating significant but partial participation. The RBI infused Rs 25,000 crore into the banking system through this auction to address the shrinkage in the banking system's liquidity surplus to ₹63,745 crore as on September 17.
The report from Nuvama Wealth, published on September 18, 2025, also noted a plunge in the system liquidity to ₹63,745 crore, the lowest in five months, due to larger than expected advance tax payouts. The report further stated that the latest system liquidity stands in surplus, but it has plunged significantly.
Meanwhile, the yield of the 10-year benchmark Government Security (6.33 per cent GS 2035) increased by 4 basis points to close at 6.51 per cent. This rise in the yield came after US Treasury yields increased despite the Fed cutting the federal funds rate.
Trade uncertainty remains a key overhang, according to Anindya Banerjee. Until a trade agreement with the US is finalised, the rupee is likely to stay under pressure from Foreign Portfolio Investor (FPI) outflows and speculative selling. However, he also observed that since the Fed meeting, the US Dollar Index has largely moved sideways, yet the USDINR climbed above 88.
In a more positive note, Anindya Banerjee also stated that the rupee looks undervalued relative to its Emerging Market (EM) peers. In the near term, he expects USDINR to consolidate within a 87.70-88.70 range on spot. Near-term, he sees spot USDINR supported at 87.65 with resistance at 88.40, according to Dilip Parmar.
In conclusion, while the rupee faces pressure due to trade uncertainty and regional currency weakness, analysts remain optimistic about potential appreciation post a trade deal. The RBI's liquidity infusion through the VRR auction also aims to address the current liquidity crunch.
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