Rupee falls, tracking Asian peers; partial rollback of RBI FX curbs weighs

The Indian rupee logged its steepest fall in a week on Tuesday, tracking weakness in most regional peers and also weighed down by the partial rollback of measures the central bank had undertaken recently to support the strained South Asian ‌currency.

The rupee fell ⁠0.4% ⁠to close at 93.50 per U.S. dollar. Dollar-rupee forward premiums, which bake in the cost of hedging, rose with the 1-year forward implied yield up 10 bps at 3.10%.

Asian currencies were under pressure against the dollar as well, with uncertainty over Middle East peace talks keeping investors on edge. Significant ⁠hurdles remain ‌as the end of a two-week ceasefire approaches.

The rupee ​was also bogged down by the Reserve ⁠Bank of India's partial withdrawal of FX restrictions ​imposed earlier this month.

"The decision to ease some of the measures appears to be aimed at striking a balance between supporting genuine hedging needs while curbing arbitrage/speculative activity," Radhika Rao, senior economist at DBS said in a note.

"While the direction of global geopolitics and energy market ‌dynamics remains uncertain, the risk of further incremental measures will keep aggressive rupee bears at bay."

Despite ​the central ​bank's relaxations, Indian ⁠banks are still holding back from offering Indian rupee non-deliverable forwards to clients amid lingering worries over compliance and supervisory risks.

In ​the near-term, oil prices and foreign portfolio flows are expected to be key drivers for the rupee. On Tuesday, three traders also pointed to intermittent dollar sales by state-run banks, which helped limit the rupee's losses.