Rupee Breaches 90! Can RBI's Move Save India's Currency?

Rupee Stabilizes After Breaching 90 Mark

The Indian Rupee showed signs of stabilization, closing at 89.98 against the US Dollar on Tuesday, just a day after it breached the significant psychological barrier of 90 against the greenback. The currency had hit an intraday low of 90.42 before recovering.

Key Developments

• Currency Recovery: The domestic currency managed to reverse its losses for the day due to substantial dollar sales from foreign banks.
• NDF Market Influence: Selling interest in the non-deliverable forwards (NDF) market also played a role in supporting the rupee's intraday recovery.
• Underlying Pressures: Despite the brief respite, the rupee remains under pressure, largely attributed to persistent issues such as wider trade deficits and subdued investment flows into the country.
• Stalled Trade Talks: Ongoing stalled trade talks with the United States are also cited as a factor that has slowed down essential inflows.

RBI's Stance and Market Expectations

The Reserve Bank of India (RBI) is reportedly tolerating a weaker exchange rate, reflecting the current scenario of subdued foreign inflows. Market participants are keenly awaiting the RBI's monetary policy decision, scheduled for Friday, as it is expected to significantly influence currency sentiment in the near term.

Future Outlook

While immediate pressure on the rupee is expected to continue, a potential positive development could emerge from progress in trade talks. Analysts suggest that a breakthrough in these discussions could support a reversal in the rupee's trend by next year.

Impact

• A weaker rupee generally increases the cost of imports for India, potentially contributing to inflation. It also makes foreign investments less attractive in the short term.
• Conversely, it can make Indian exports cheaper, providing a boost to export-oriented industries.
• The volatility in currency markets affects overall investor sentiment and can influence capital flows into the stock market.
• Impact Rating: 8/10

Difficult Terms Explained

• Greenback: A common nickname for the United States Dollar.
• Non-Deliverable Forwards (NDF): A cash-settled forward contract on a currency, typically used when there are capital controls or other restrictions on direct currency trading. They allow speculation on currency movements without physical delivery.
• Trade Deficit: Occurs when the value of a country's imports exceeds the value of its exports.
• Inflows: Money flowing into a country's financial markets, such as foreign direct investment or portfolio investment.
• Monetary Policy: Actions undertaken by a central bank, like the RBI, to manipulate the money supply and credit conditions to stimulate or restrain economic activity.