The rupee continued to fall and closed at a fresh record low on Monday as the greenback maintained its strength. With the dollar index hovering around four-month high of 105.05 and the US Treasury yields rising, the pressure on the rupee is likely to continue till the markets get clarity over policies to be undertaken by the Trump administration.
After falling to Rs 84.40 intra-day, the rupee closed at 84.3875, against 84.3750 on Friday. It may touch the 85-mark if the dollar index appreciates to 106-107, said market participants.
At the start of the trading day on Monday, traders were anticipating the currency to fall to 84.60. However, the likely intervention from the RBI on both the buying and selling sides contained any sharp decline.
“The RBI is not letting the rupee to sharply depreciate, it is on both the sides. Even after touching a record low, the rupee ended flat, just 1 paisa lower. The RBI is allowing gradual weakening of the rupee…” said a dealer with a private bank.
Traders said the central bank is allowing the depreciation in rupee in tandem with other Asian currencies, especially the Chinese yuan.
A depreciating yuan will lower the cost of Chinese goods, potentially leading to more imports and further widening of India’s biggest trade deficit with any country. The RBI is poised to cushion the blow by allowing a weaker rupee, even while using its ample reserves to keep the fall in check, traders said.
“Globally, there has been pressure on Asian currencies. The rupee will continue to be under pressure at least for some time. It will sustain 84.50 levels unless there is a sharp appreciation in the dollar index,” said a trader with a private bank.
Analysts have already started revising their rupee forecasts. The currency will breach 85 to a dollar within 12 months, according to HDFC Bank, while IDFC First Bank sees it hitting 84.50 much before its earlier projection of March.
“Given overvaluation concerns and to keep the rupee competitive – especially with a weakening yuan – the central bank could prefer an orderly depreciation in the rupee over the coming year,” HDFC Bank economists, led by Abheek Barua, wrote in a note.
Most Asian currencies were trading lower, down between 0.1% and 0.4%.
Most traders are expecting the domestic currency to trade within the 83.80 to 84.50 range during the medium term as the central bank has enough forex reserves to cushion the slide. Notably, forex reserves in the country dropped to $682.12 billion, a decline by $2.675 billion, for the week ended November 1, the RBI said on Friday. The forex kitty is now at a two-month low, according to the latest data.
Additionally, persistent foreign outflows from the equity markets have been weighing on the rupee. Overseas investors have pulled out a net of $2.5 billion from Indian stocks so far in November, adding to $11 billion of outflows in October. (With inputs from Bloomberg)