The Indian rupee hit a new all-time low on Monday, depreciating by 1 paisa to 84.38 against the US dollar in early trading. This marginal drop is part of a recent downward trend attributed to persistent foreign fund outflows and subdued performance in domestic equities. Market analysts suggest that unless there’s a reduction in the dollar’s strength or a shift in foreign fund outflows, the rupee may remain under pressure.
At the interbank foreign exchange market, the rupee opened at 84.38 per dollar, a historic low, reflecting a 1 paisa decline from its previous close. On Friday, the rupee had already weakened by 5 paise, closing at 84.37 per dollar—a record low at the time—marking its third consecutive session of losses. Over the past week, several global factors, particularly the US elections, have contributed to the rupee’s vulnerability, alongside a trend of foreign investors pulling out of Indian equities.
Foreign fund outflows continue
Foreign Institutional Investors (FIIs) have continued to withdraw capital, contributing to the downward pressure on the rupee. October witnessed approximately $12 billion in equity sell-offs by FIIs, and November has seen an additional $1.6 billion outflow in the first 10 days alone. According to Amit Pabari, Managing Director of CR Forex Advisors, this trend can be linked to concerns over the overvaluation of Indian equities and disappointing Q2 earnings, making Indian markets less attractive to foreign investors. “In the medium term, the rupee is expected to trade within the 83.80 to 84.50 range as the Reserve Bank seems to cap the downside of the rupee with sufficient Forex reserves in its kitty,” Pabari added, highlighting the role of the Reserve Bank of India (RBI) in stabilizing the currency.
Dollar index and global economic factors
The dollar index, which measures the dollar’s strength against a basket of six major currencies, was up by 0.05% at 105.05 in early trading on Monday. The strong performance of the dollar has been partly fueled by expectations surrounding US economic policies and upcoming interest rate decisions. A stronger dollar tends to put pressure on emerging market currencies, including the rupee, as global investors seek safer assets.
Additionally, the oil market, which influences India’s trade balance, also showed volatility. Brent crude, the global oil benchmark, dropped 0.37% to $73.60 per barrel in futures trading, which is generally favorable for an oil-importing country like India. However, the benefits are overshadowed by the broader economic pressures affecting the rupee.
Domestic equity markets remain muted
The Indian stock market opened on a muted note on Monday. At the time of reporting, the BSE Sensex was trading slightly lower, down by 12.47 points, or 0.02%, at 79,473.85, while the Nifty was down 5.65 points, or 0.02%, at 24,142.55. The subdued performance of the equity market reflects investor caution amid global uncertainties and economic challenges. Data from the exchanges indicated that FIIs were net sellers on Friday, offloading shares worth Rs 3,404.04 crore.
RBI’s forex reserves decline
India’s forex reserves, which serve as a buffer against currency volatility, have also shown signs of strain. As per the Reserve Bank of India’s latest report, the reserves fell by $2.675 billion to $682.13 billion for the week ending November 1. This follows a $3.463 billion drop in the previous week, marking a sharp decline from the all-time high of $704.885 billion recorded at the end of September. While the reserves remain robust, the decline signals the impact of the ongoing currency intervention measures by the RBI, intended to stabilize the rupee amid heightened volatility.
Market outlook
Forex traders expect the rupee to continue facing headwinds, particularly if the dollar index remains strong and foreign fund outflows persist. Pabari from CR Forex Advisors noted that the current range for the rupee could be between 83.80 and 84.50 in the short to medium term, with the Reserve Bank likely to intervene if necessary. However, he pointed out that despite these interventions, the rupee’s trajectory will largely depend on global cues and the strength of the dollar.
The recent depreciation of the rupee underscores the challenges India faces from external economic pressures and domestic financial stability issues. While the decline in forex reserves suggests a cautious approach by the RBI, the continuous outflow of foreign funds indicates investor concerns about the valuation of Indian assets and market growth prospects.
In summary, the rupee’s performance on Monday reflects broader economic challenges, both domestic and international. Forex analysts suggest that any shift in the dollar’s strength or a reversal of foreign fund flows could help alleviate some of the pressure on the Indian currency. However, in the near term, the rupee appears set to remain within a narrow range, with close monitoring by the RBI and market participants.