The recent record low of the rupee against the US dollar is largely driven by a combination of global and domestic factors. Initially, uncertainties surrounding global events, such as the Trump election, significantly impacted the currency. However, the focus has now shifted to domestic factors, particularly India’s GDP performance, which has become a key driver. The weakness in the Indian rupee is expected to persist, and there could be a possibility of the rupee reaching the 85 mark in the future.
Experts with whom THE WEEK spoke to feel that economic uncertainties are expected to continue in the near future as well. “The continued economic pressures suggest that this downward trend could continue in the near term. Another significant factor contributing to Rupee’s decline, as one would suggest is the gargantuan selling spree of the Foreign Institutional Investors (FIIs),” remarked Vishnu Kant Upadhyay, AVP - Research and Advisory at Master Capital Services Ltd.
He points out that the in the current Calendar Year FIIs have withdrawn over 9,84,448.2 cr from the Indian Markets. This outflow coinciding with the aforementioned factors creates a scenario that particularly does not favour the revival of the INR.
“The RBI may also intervene in the dollar market to provide the rupee with some temporary strength, although broader economic factors will likely keep the rupee under pressure. Decisions regarding the Cash Reserve Ratio (CRR) and other measures from the RBI could also play a role in influencing market sentiment and liquidity, but they may not be enough to reverse the rupee's overall weakness,” added Upadhyay.
Experts opine that a weaker rupee raises the cost of imports and may result in higher inflation rates, the recent drop of the Indian rupee vs the US dollar has important ramifications for the Indian economy. Customers may be harmed and their purchasing power diminished. The growing expense of servicing foreign currency debt represents a hardship for companies that have such debt.
“Indian businesses may find it more costly to obtain money overseas if their currency depreciates since it can undermine investor confidence. The timing of a rupee reversal is unpredictable and contingent on a number of variables like rupee might gain from a downturn in the US economy or a weakening of the US currency. The rupee can be stabilized with the support of stronger economic development and better export results,” said Pravesh Gour, Senior Technical Analyst at Swastika Investmart Ltd.
He explains that the rupee can be supported by the Reserve Bank of India (RBI) intervening in the foreign exchange market, although this is a temporary solution. “It's crucial to remember that the economy doesn't always suffer when the rupee declines. It might be a normal response to shifting international economic circumstances. On the other hand, economic instability may result from excessive depreciation. The secret is to balance the risks and rewards of managing the exchange rate,” remarked Gour.
The America First, MAGA policies and DOGE all are expected to strengthen dollar. Emerging market currencies including the INR would definitely feel the pressure. “FPIs are sitting on good profits. For CY24 (YTD) their net sales is around USD 34 billion. Looks like a part of profit booking would get deployed towards their home markets which will not be surprising. US markets are expected to continue to do well. Tariff tax was not really much of a worry for Indian markets but BRICS and de-dollarization related comments really damaged the sentiment and INR started inching towards 85 swiftly. I am expecting INR to be volatile till the dust settles,” said Manish Jain, Director - Institutional Business (Equity & FI) Division at Mirae Asset Capital Markets.
Experts do observe that the the Rupee depreciation can attributed to several factors: ongoing concerns about a potential BRICS currency following Donald Trump's remarks, heightened political risks within the EU, weakening domestic macroeconomic indicators, and persistent foreign institutional investor (FII) outflows from Indian equity markets. Looking forward, the Reserve Bank of India (RBI) is scheduled to announce its monetary policy decision on Friday, December 6th.
“Market expectations suggest that the central bank will maintain the status quo, leaving the repo rate unchanged. However, global attention remains focused on the U.S. Federal Reserve, which is expected to cut interest rates by 25 basis points on December 18th. The updated dot plot from the Fed is likely to provide key guidance for monetary policy in the first half of 2025. On the international front, President-elect Donald Trump's pro-America stance is anticipated to fuel inflationary pressures and support dollar strength. Consequently, the USD-INR pair is expected to appreciate further, potentially pushing the rupee to new lows in the near term. Forecasting exact levels remains challenging given the volatility, but the bearish undertone for the rupee persists,” said Jigar Trivedi Senior Analyst Reliance Securities.
This expert has recommendations for traders and recommends that it is better to adopt a long position on USD/INR during dips, targeting 85.30 levels for December and January. “As global and domestic dynamics evolve, close monitoring of geopolitical developments and central bank actions will be crucial,” added Trivedi.