Rupee Nears Record Low Against the Dollar: Causes and Current Trends

The Indian rupee has faced a prolonged downtrend over the past few months, nearing its record low against the US dollar. As of this report, the rupee was trading at 84.40 per dollar, close to the all-time low of 84.48. This decline highlights ongoing economic and geopolitical challenges for the currency, with persistent foreign outflows and high demand for the dollar weighing heavily on its performance.

Heavy FPI Outflows Add Pressure on the Rupee

Foreign Portfolio Investors (FPIs) have been major sellers in the Indian equity market, a factor that has significantly contributed to the rupee’s depreciation. On Monday alone, FPIs sold shares worth Rs 2,306 crore, with cumulative sales in November reaching nearly $2.80 billion. This comes on the heels of a substantial October sell-off, where FPIs offloaded $11.19 billion. A slowdown in FPI selling may provide some relief for the rupee, although the likelihood of short-term recovery remains uncertain.

RBI Interventions: Stabilizing the Currency Amid Volatility

The Reserve Bank of India (RBI) has taken an active stance in managing the rupee’s volatility, providing intermittent stability to prevent excessive depreciation. Analysts anticipate the rupee will continue to hover within a range of 84.05 to 84.70 in the near term, with a support level at 83.90 and a resistance at 84.70. The RBI’s interventions, primarily through dollar sales via government banks, have allowed the rupee to outperform other emerging market currencies, though India’s foreign exchange reserves have been affected as a result.

The Impact of a Strong Dollar and Rising Dollar Index

The global strength of the dollar has further intensified the rupee’s depreciation. The Dollar Index (DXY), which measures the dollar’s value against six major currencies, has recently hit a four-month high, underscoring the dollar’s dominance. A stronger dollar puts additional downward pressure on the rupee, complicating the RBI’s stabilization efforts.

Inflation Data: A Key Influencer on Future Currency Movements

Currency traders are closely monitoring upcoming inflation data releases from both the US and India. These figures could shape short-term currency trends, with inflationary pressures potentially influencing the rupee’s direction. Analysts currently expect the rupee to stay weak in the short term, though they acknowledge that the RBI’s interventions will provide a temporary buffer against excessive declines.

Foreign Exchange Reserves Under Strain

As the RBI steps up its dollar sales to counter rupee depreciation, India’s foreign exchange reserves have experienced a decline. The exact extent of the RBI’s intervention remains uncertain, but the impact on reserves is notable. While these actions have given the rupee some stability, the erosion of reserves adds a layer of complexity to India’s economic resilience.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.