Rupee hits 89.73, spotlight shifts to RBI as pressure mounts

Indian Rupee Hits All-Time Low, Falls to Rs 89.73 Per US Dollar

The Indian rupee has slipped to a record low of Rs 89.73 per US dollar in early trade on Monday, surpassing its previous low of Rs 89.49. This significant drop comes despite the country's recent strong economic growth numbers.

Principal Drivers of the Rupee's Sharp Drop

• Persistent Foreign Outflows: Weak capital inflows and disappointing flows into the country's foreign-exchange system are driving the rupee's downward trend.
• Disappointing Trade Deal Prospects: The long-mooted trade agreement between India and the United States remains elusive, failing to galvanize dollar inflows or improve sentiment for the rupee.
• Hefty Foreign-Exchange Needs: Importers' dollar demand is high, particularly for crude oil, raw materials, and other imports, which is exacerbating downward pressure on the rupee.
• Hedging Activity: Increased hedging activity in the non-deliverable forward market has amplified broader dollar demand, adding to the strain on the rupee.

Implications of the Depreciation

• Boost to Exports: A weaker rupee makes Indian goods more competitive abroad, potentially boosting export volumes.
• Remittances: Remittances from abroad convert into more rupees, offering some benefit to households earning in foreign currency.
• Increased Import Costs: Imports, especially of crude oil and other essentials, become more expensive, raising costs for businesses and pushing inflation up.

Macroeconomic Concerns

Persistent rupee weakness alongside a widening trade deficit and capital outflows could erode foreign exchange reserves and narrow the external-financing cushion, limiting the Reserve Bank of India's (RBI) flexibility in defending the currency or managing liquidity over the medium term.

Looking Ahead

The rupee's near-term trajectory will remain vulnerable unless there is a turnaround in foreign-portfolio flows, fresh foreign direct investment, or clarity and progress in trade-deal negotiations that could restore investor confidence.

Importers and corporates are expected to continue hedging dollar exposure, dollar demand is likely to stay elevated, and any global dollar-strengthening (or weakness in crude prices) could further influence INR valuation.