Rupee Tumbles to Record Low of 90/Dollar! Will RBI Step In?

India's rupee has reached an unprecedented low, falling below 90 against the US dollar for the first time. This significant depreciation has raised concerns among traders, importers, and policymakers, who are now eagerly awaiting the Reserve Bank of India's policy announcement for potential stabilization measures.

Key Drivers of Depreciation

• The rupee's sharp decline is attributed to a confluence of global and domestic pressures. These include uncertainty surrounding a potential India-US trade deal, persistently high global commodity prices, and subdued foreign portfolio flows into Indian markets.

Impact on Imports and Inflation

• A weaker rupee makes imports significantly more expensive. This directly impacts companies reliant on foreign goods, particularly for essential items like fuel, machinery, and electronics. Consequently, it fuels inflation risks and increases operational costs for a wide range of businesses.

Expert Analysis

• Jateen Trivedi, VP Research Analyst – Commodity and Currency at LKP Securities, highlights the absence of clarity on the India-US trade deal as a major catalyst for the rupee's fall. He suggests that repeated delays have led markets to seek concrete assurances, accelerating selling pressure on the currency. Additionally, record-high global metal and bullion prices are increasing India's import bill, while higher US tariffs affect export competitiveness. Trivedi also noted muted Reserve Bank of India intervention as a contributing factor, stating that the market expects the RBI's policy announcement to provide clarity on intervention strategies.

RBI's Strategic Approach

• Analysts, like Radhika Rao, Senior Economist at DBS Bank, suggest the Reserve Bank of India might be allowing the currency more room to adjust to reflect underlying macroeconomic shifts. This strategy could aim to maintain competitiveness for manufacturing, address unfavorable tariff differentials, and manage a subdued portfolio investment outlook.
• By not aggressively defending the rupee, the RBI might also be conserving foreign exchange reserves and avoiding sudden market distortions.

Foreign Investor Sentiment

• Foreign investors have shown caution due to global interest rate movements and domestic valuations. Their exits or reduced inflows increase demand for dollars, further pressuring the rupee. Bank of America noted that while India's reserves remain adequate for now, sustained portfolio outflows could challenge the RBI's intervention capabilities.

Future Outlook

• Bank of America forecasts potential relief for the rupee next year, anticipating mild appreciation driven by expected US dollar weakness. They project the INR to reach 86 per USD by the end of 2026.

Upcoming RBI Policy

• All attention is now focused on the Reserve Bank of India's Monetary Policy Committee meeting scheduled for Friday. While no change in interest rates is anticipated, investors and markets will closely monitor any guidance on liquidity, inflation control, and the central bank's strategy for currency management.

Impact

• The rupee's continued depreciation could lead to higher imported inflation, impacting the cost of living for Indian consumers.
• Businesses relying on imports, such as fuel retailers, electronics manufacturers, and machinery importers, will face increased costs, potentially affecting their profitability and passing costs to consumers.
• Exporters might benefit from a weaker rupee making their goods cheaper abroad, but this advantage could be offset by rising input costs for imported raw materials.
• The Reserve Bank of India's actions and communication at its upcoming policy meeting will be crucial for stabilizing market sentiment and managing currency volatility.
• Impact Rating: 8

Difficult Terms Explained

• Depreciation: A decrease in the value of a currency relative to another currency.
• Portfolio Flows: Investments made by foreign investors into a country's financial assets like stocks and bonds, rather than direct investment in physical assets or businesses.
• Import Bill: The total cost of all goods and services imported by a country over a specific period.
• Current Account Deficit: The difference between a country's exports and imports of goods, services, and net transfer payments. A deficit means imports exceed exports.
• Muted Intervention: When a central bank intervenes in the foreign exchange market less frequently or with smaller amounts than expected, allowing the currency to move more freely.
• Oversold: In technical analysis, a situation where a security or currency has been traded so much that its price is believed to have fallen too far, potentially indicating a future price increase.
• Monetary Policy Committee (MPC): A committee of the Reserve Bank of India responsible for setting the benchmark interest rate (repo rate) to control inflation and achieve macroeconomic stability.