The Indian rupee plunged to an all-time low against the US dollar on Friday, triggering concerns among market participants and importers. The Reserve Bank of India (RBI) intervened in the forex market to stabilize the currency after witnessing unprecedented pressures. This event underscores the growing complexities in global and domestic financial ecosystems.
Key Highlights
- The Indian rupee hit a record low of 85.83 per dollar before recovering slightly to close at 85.53.
- The fall was driven by dollar demand in maturing non-deliverable forwards (NDF) and currency futures.
- Panic buying by importers exacerbated the situation, but late RBI intervention provided relief.
- Persistent foreign portfolio investor (FPI) outflows and a widening trade deficit added to the rupee’s woes.
- The global dollar index remained strong at 107.96.
Understanding the Rupee’s Decline
The rupee’s sharp fall can be attributed to several factors:
1. Strong Dollar Amid Global Pressures
The US dollar maintained its strength against major currencies. This trend stems from expectations that the Federal Reserve might limit interest rate cuts next year. Additionally, fears of protectionist policies under Donald Trump and rising US inflation have further bolstered the greenback.
2. Persistent FPI Outflows
Foreign investors have been pulling funds out of Indian equity markets, citing valuation concerns. On Friday alone, FPIs were net sellers to the tune of ₹1,324 crore. The shift in investor preference towards US treasuries and other global markets, such as China, has weakened the rupee.
3. Rising Crude Oil Prices and Trade Deficit
India’s trade deficit continues to widen, exerting additional pressure on the rupee. Rising crude oil prices have amplified import costs, leading to increased demand for dollars.
4. Monthly Futures Expiry and NDF Market Impact
The December futures contract expiry contributed to the rupee’s fall, alongside speculation about the RBI’s positions in the non-deliverable forward (NDF) market. The central bank’s decision not to roll over these positions likely influenced the dollar’s appreciation in this segment.
RBI’s Role in Stabilizing the Rupee
The RBI’s intervention was crucial in curbing the rupee’s freefall. The central bank stepped in towards the session’s end, selling dollars in the spot market. Additionally, the RBI has been active in the NDF market, which allows currency hedging without depleting forex reserves.
Real Effective Exchange Rate (REER) Insights
The rupee’s overvaluation has been a longstanding concern. Data reveals that its 40-currency REER rose to a multi-year high of 108.14 in November, signaling an overvaluation of approximately 8%. Analysts believe the RBI is letting the rupee adjust to correct this imbalance.
Market Reactions
Equity Market Performance
Despite the rupee’s record fall, Indian equity markets ended on a positive note:
- BSE Sensex rose by 226 points.
- Nifty closed above the 23,800 mark.
Auto and banking shares were the top gainers, providing support to the markets even as investors remained cautious due to FII outflows and rupee depreciation.
Forex Market Outlook
Anuj Choudhary, a research analyst at Mirae Asset Sharekhan, projected that the USD-INR spot price could trade in the range of 85.30-85.85. He attributed the rupee’s fall to importers’ dollar demand, FPI outflows, and rising US treasury yields.
Implications for Importers and Exporters
Importers’ Concerns
The rupee’s depreciation has raised costs for importers, particularly those reliant on crude oil and raw materials. Panic buying of dollars further exacerbated the situation on Friday.
Exporters’ Advantage
Conversely, exporters stand to benefit from a weaker rupee, as it makes Indian goods more competitive in global markets. However, the benefits depend on the stability of exchange rates over time.
What Lies Ahead?
1. Global Influences
The rupee’s trajectory will likely remain tied to global factors, such as US Federal Reserve policies, crude oil prices, and geopolitical developments.
2. Domestic Measures
The Indian government and RBI may need to take coordinated steps to:
- Address the trade deficit.
- Attract FPI inflows by ensuring market stability.
- Strengthen the rupee through targeted interventions.
Conclusion
The record fall of the rupee against the dollar highlights the challenges faced by India in balancing global pressures and domestic economic needs. While the RBI’s timely intervention provided temporary relief, sustained efforts will be essential to stabilize the currency and boost investor confidence.
By monitoring global trends and adopting prudent monetary policies, India can navigate these turbulent times and maintain economic resilience.
