MUMBAI, Oct 12 (Reuters) - The Indian rupee rose about 1% on Monday after the central bank took steps to temper dollar demand in spot and derivatives markets, with likely intervention through dollar sales adding to the gains.
The rupee rose 1% to 95.77 per dollar from 96.73 on Friday, outperforming mostly rangebound Asian peers and posting its best single day gain since April, which had also been sparked a set of measures to shore up the unit.
India announced new steps on Saturday after the rupee neared its record low of 96.96 per dollar last week.
The changes involve redirecting oil companies' dollar purchases away from the spot market and tightening hedging rules as the currency hovers near record lows.
The oil window is expected to take out about $10-12 billion of monthly dollar demand from the spot market, per government data on oil imports.
The recent moves follow a series of other measures taken to shield the currency and bolster the country's balance of payments strained by a heavy import bill due to high oil prices and persistent capital outflows.
Banks turned cautious about offering forward dollar hedges to importers on Monday after the Reserve Bank of India's latest forex measures sharply raised costs and are expected to slow a hedging surge that had dragged the currency, bankers said.
Expectations of longer-term weakness pushed importers to step up purchases of forward dollars to record levels last month. That hedging demand, in turn, added strain on the currency, creating a cycle of depreciation expectations, increased hedging and further weakness in the rupee.
The RBI also likely intervened in the FX market on Monday to bolster the rupee's gains through dollar sales by state-run banks, traders said.
RALLY FACES A TEST
While the rupee has rallied sharply in the aftermath of the RBI's measures, the sustainability of the recovery will depend on whether underlying pressures subside, analysts say.
On Monday, the rally encountered one of its first hurdles when sharp rupee gains drew hedging-related flows into the non-deliverable forward market, a senior trader at a foreign bank said.
The flows were likely linked to hedging of foreign portfolio investments in India, the banker said. Persistent capital outflows - to the tune of over $30 billion from local stocks over 2026 so far - have been a persistent pain point for the rupee.
"Unless BoP pressures ease more broadly, gradual INR depreciation is likely to resume once their initial impact fades," analysts at ANZ said.
The firm has retained its medium-term INR depreciation view and said it will reassess levels after reviewing hedging and FX reserve data in the coming weeks.
India's FX reserves declined to $734 billion as of October 2 after hitting a record high of $785 billion in September.
Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala, Sonia Cheema and Nivedita Bhattacharjee
