Rupee Rapidly Approaches 86 Against the Dollar

The Indian Rupee is showing signs of significant weakness, opening lower at ₹85.8225 and subsequently closing at ₹85.74 against the US Dollar on the previous Tuesday. During intraday trading, the currency even dropped to a low of ₹85.89.

Currently, the Rupee is facing pressure due to a strong US Dollar, weakened neighboring Asian currencies, and increased demand for Dollars from importers and custodial banks acting for foreign portfolio investors (FPIs).

According to a recent report by IFA Global, US economic indicators have consistently surpassed expectations. For instance, the ISM (Institute of Supply Management) services index for December came in at 54.1, exceeding the anticipated 53.3.

Forex market analysts have noted that the strengthening of the Dollar is influenced by rising US Treasury yields and the potential for former President Trump to impose tariffs on imports from China and other nations.

Radhika Rao, a Senior Economist and Executive Director at DBS Bank, indicated that many Rupee traders are focused on the new RBI Governor’s perspective on the currency since his arrival last month.

Recent movements in the Rupee illustrate a growing acceptance for a weaker exchange rate, as seen in the 2.1% decline against the USD in the second quarter of FY24 (October-December), in contrast to a nearly stable performance in the first three quarters.

"The trend of weakness appears to be extending into the new year, compounded by the overvaluation of the broad real effective exchange rate (REER), which was at a historic high as of November. The strong intervention efforts since the fourth quarter of FY24 have drained domestic liquidity, leading to a deficit in the balance, heightened by seasonal factors. This situation persists despite the 50 basis point cut in the cash reserve ratio and bond acquisitions by the RBI," Rao explained.

This unsustainable context has been aggravated by the swift appreciation of the Dollar, thus amplifying the mismatch and intensifying the need to ease restrictions on the Rupee.

In its annual forecast, DBS Bank highlighted concerns that the USD-INR exchange rate could reach ₹86.0 due to the Dollar's strength along with pressures on capital and investment flows.

Rao also mentioned that the Rupee's adjustment phase is set to continue, given the challenging outlook for financial inflows, even though bond investors might enjoy benefits from including two additional global fixed income benchmarks this year.

Rupee, Dollar, Economy