The rupee has had a difficult year, and pressure only increased last week when it broke over the 90-per-dollar barrier for the first time. The currency is currently the weakest performer in Asia, having dropped by 5% since January.
To alleviate dollar tightness, the RBI intervened with an aggressive series of actions, such as a 25 basis point rate drop, an open-market bond purchase of Rs 1 lakh crore, and a $5 billion buy-sell exchange. Although these actions have reduced anxiety, attention will now turn to the US Federal Reserve’s policy choice later this week.
When the Fed meets on December 9–10, traders are practically entirely pricing in a rate drop of 25 basis points. Lower US rates have historically supported developing market currencies like the rupee while weakening the dollar. Analysts cautioned that the impact could be far less noticeable this time.
Why a Fed rate decrease could not be sufficient
Theoretically, a weaker dollar allows the rupee some leeway. Lower US returns encourage international investors to go to developing countries with greater yields, bringing in money that strengthens the local currency.
However, economists said that the Fed’s anticipated rate decrease has already been factored in, so until general circumstances improve, the rupee may not experience a big increase.
India’s trade deficit is now growing, foreign inflows are still inconsistent, and international investors are still wary due to geopolitical unrest. Even with a potential US rate decrease, this lessens the likelihood of any significant rupee rise.
Nothing will materially alter the direction of the rupee unless India’s trade agreement with the US materializes, according to Bhavik Patel, senior commodities analyst at Tradebulls Securities. The currency markets have already taken Fed rate decreases into account.
Sluggish global demand and India’s record trade deficit in October point to a structural rather than a short-term problem for the currency.
Weak inflows are depressing the currency.
This year, foreign investment—both FDI and FPI—has been inconsistent and has not helped the rupee much. For now, minimal participation is making the currency more sensitive to bad news, but analysts think inflows may increase if global volatility decreases.
According to Jigar Trivedi, senior analyst at Reliance Securities, “poor foreign inflows and a huge trade imbalance would likely prevent any substantial appreciation, even though the RBI’s liquidity injection and neutral policy stance might give temporary assistance.” He believes that the most important levels to keep an eye on this week are 89.3–90.4.
The Fed’s move might be “marginally good” for the rupee, according to Aamir Makda, commodity and currency analyst at Choice Broking. In the upcoming week, he anticipates that USD/INR will “sustain above 90,” with 88.2–87.5 serving as crucial support levels.
The US dollar index has not increased significantly in recent months, which further clouds the picture. This implies that India-specific causes rather than general dollar strength are responsible for the rupee’s decline. Pressure has increased due to rising dollar demand for imports, business hedging, and repayment of external debt. Global investors have been looking for safer assets at the same time, which has reduced flows into emerging countries.
A Fed rate decrease would reduce volatility, but until India’s trade deficit shrinks and foreign inflows significantly increase, a robust and long-lasting recovery in the rupee seems doubtful. The rupee is still in a precarious situation for the time being; while stabilization is feasible, a more significant recovery seems unattainable.
