DBS Sees Rupee Holding Range as Liquidity Surplus Builds

Key Moments

Rupee Performance and USD/INR Outlook

DBS Group Research reports that the Indian rupee’s earlier strength, which was supported by official intervention and robust inflows, has now given way to a more stable trading pattern. According to the note, USD/INR has consolidated around the mid-94 area this week.

With oil prices edging higher and the U.S. dollar underpinned by expectations of further U.S. rate hikes, DBS anticipates that any declines in USD/INR will likely be limited. At the same time, the recent wave of inflows has eased the probability of a sharp, one-directional weakening of the rupee in the near term by bolstering available policy tools.

Surging Liquidity and Market Dynamics

DBS highlights that market focus is now firmly on the liquidity impact of strong inflows via the Reserve Bank of India’s (RBI) swap windows. The banking system’s surplus has risen significantly, pushing past INR 10trn this week and surpassing prior peaks seen in 2022 and during the Covid period. The durable liquidity balance has widened to roughly INR 14trn, contributing to downward pressure on overnight call rates. This compares with an average surplus of around INR 1trn in late June.

DBS notes that this exceptionally ample liquidity environment complicates efforts to absorb surplus funds, even as policy expectations turn more hawkish.