Rupee nears 90 amid weakness; experts discuss RBI rate cut and bond market outlook

The Indian Rupee is facing significant headwinds, establishing itself as one of Asia's worst-performing emerging market currencies in 2025 with a decline of nearly 4.5%. The currency has seen a sharp depreciation of 1.5% since November 18, following the announcement of a record-high trade deficit for October. With the rupee under pressure, market chatter suggests the 90-per-dollar mark could soon be tested. Simultaneously, rising bond yields since the release of Q2 GDP data have cast doubt on a certain rate cut by the Reserve Bank of India (RBI) in its upcoming policy meeting on December 5. In a discussion on CNBC TV18, market experts Dhiraj Nim of ANZ Research and Suyash Choudhary, Head of Fixed Income at Bandhan AMC, dissected the outlook for the currency and fixed income markets. Dhiraj Nim stated that a level of 90 for the rupee is "very much on the cards." He attributed the weakness to the uncertainty surrounding a trade deal, which puts future economic growth at risk, widens the current account deficit, and keeps capital flows deficient. "All of that points to an adjustment in the currency, which is also warranted from an economic perspective," Nim argued. He believes the rupee will continue to weaken at a moderate pace until a favourable trade deal is finalised. While the RBI's data showed the rupee to be undervalued on a real effective exchange rate (REER) basis, Nim suggested that a competitive exchange rate is necessary for India's exports. He warned that the current low consumer price index (CPI) inflation, which helps the REER, is a temporary tailwind expected to reverse from Q2 2026, necessitating spot depreciation to maintain competitiveness. Shifting focus to the bond market, Suyash Choudhary advised against overreacting to the recent rise in yields following the Q2 GDP data, pointing to statistical distortions like a low deflator. He anticipates that the RBI's Monetary Policy Committee (MPC) will proceed with a 25 basis point rate cut on December 5, viewing it as a "judgment call" given the clear prior guidance. Choudhary emphasised that the commentary accompanying the decision will be crucial. "What the bond market will also look for is commentary that does not transmit volatility or uncertainty to the market," he said, hoping for reassurance of a benign rate cycle. Furthermore, he highlighted the market's expectation for significant liquidity support, projecting open market operation (OMO) purchases of around ₹2 lakh crore over the next three months to counteract diminishing core liquidity. Choudhary sees the 10-year bond yield in a range of plus or minus 10 basis points from current levels, with the key opportunities in the five to eight-year segment. On the interplay between policy actions and the currency, Nim expects a rate cut and subsequent liquidity measures to exert some downward pressure on the rupee, viewing it as part of a necessary broader adjustment. Choudhary cautioned against more than one rate cut, arguing it is better to "keep some buffers in play" and hold the policy rate steady for longer to ensure effective transmission, rather than cutting aggressively and creating uncertainty about a future normalisation cycle. In the event of no rate cut, he said the market could see a roughly 10 basis point sell-off if the decision is read as signalling that the easing cycle is near its end. Nim concluded by stating his firm's year-end target for the rupee is 91.5 by the end of 2026, assuming no rollback of tariffs and a 4–5 percent weakening in the broad dollar index. He believes the RBI will use its rate policy exclusively for domestic growth and inflation, while managing the currency through its separate FX toolkit, thereby justifying a rate cut to support the domestic economy.