In Samvat 2081, the rupee remained under pressure because of global headwinds like the US government’s tariff pressure and geopolitical tensions. As a result, it fell by 4.62% – the highest in three years and the third highest in the last decade.
It would have done worse had the Reserve Bank of India (RBI) not aggressively stepped in last week to stop the slide. The $5-billion intervention on a single day helped arrest the depreciation, which had gone up to 5.6% when the rupee hit a lifetime low of 88.80. The rupee finally closed at 87.97, down 4.6% for Samvat 2081.
Under governor Sanjay Malhotra, the RBI was quite happy for the large part of the year to let the currency find its own levels, and help exporters, especially after tariffs were imposed. But last week, the RBI intervened when speculators continued to push the rupee towards 89. The Diwali message is clear: Speculation will not be tolerated.
Said Ritesh Bhansali, deputy CEO at Mecklai Financial Services, “During Governor Shaktikanta Das’ regime, the RBI intervened almost on a daily basis to keep the rupee within a tight 10-20 paisa range. After Malhotra took charge as the governor, the RBI shifted its approach, allowing more day-to-day rupee volatility.” He added that the intervention last week helped reduce long positions.
Due to this sharp fall, the rupee was the worst-performing currency among its Asian peers after the Indonesian rupiah. The Taiwanese dollar rose the most at 4.4%, followed by Malaysian ringgit at 3.6% and Thai bhat at 3.3%. The dollar weakness could not support the rupee, unlike for most other currencies.
The RBI’s latest bulletin showed the real effective exchange rate (REER) dropped to 98.79 in August from 100.19 in July, its lowest since February 2019, indicating the rupee is undervalued against a basket of 40 currencies.
Since the Trump administration took charge in January, the rupee has been weak due to concerns over trade tariffs. The subsequent geopolitical tensions, such as the Russia-Ukraine war and the Israel-Iran conflict, along with India-Pakistan tension, also contributed to the headwinds. When Trump imposed a 50% tariff on Indian goods, the rupee weakened further along with shocks from the H-1B visa fee hike. Further, consistent foreign outflows and higher gold prices impacted the rupee performance.
Going ahead, market participants expect a trade deal by November, which can help the rupee appreciate. “If the trade deal happens, the rupee is expected to trade between 87.5 and 87.9, supported by a weak dollar,” said Madhavankutty G, chief economist, Canara Bank.
Agreed Kunal Sodhani, treasury head, Shinhan Bank, “Any positive outcome on the trade front may help the rupee. But overall, a slow and steady depreciation can be expected.”
According to him, it will also be important to watch out for the rupee-yuan pair. “The RBI may also look to keep a track on the Chinese yuan as China is a big exporter and competitor to India. Therefore, it may not intervene aggressively to maintain the export competitiveness,” Sodhani said.