The Indian rupee dropped to a lifetime low on Monday, with unfavourable trade and portfolio flows and the lack of a US-India trade deal overshadowing the boost from stellar growth. The rupee declined to 89.59 against the US dollar, dipping past its previous record low of 89.49 hit about two weeks ago.
Why did the rupee decline?
The drop came right after India posted a blowout GDP number that exceeded all expectations. The economy expanded 8.2% in the September quarter, far above the 7.3% estimated in a Reuters poll. Bankers said the robust growth has offered little respite to the rupee, which remains pressured by the lack of progress on a US-India trade deal, importer hedging activity, and a balance of payments position that has turned less supportive.
Delays in US trade deal puts rupee under pressure
On Monday, the maturity of positions in the non-deliverable forwards market also exerted pressure on the currency, traders said, while state-run banks were spotted offering dollars intermittently. “Calibrated” rupee depreciation is “both inevitable and desirable” in the current macro environment, economists at J.P. Morgan said in a note.
The longer there is no trade deal, the greater the onus on rupee depreciation to provide that offset, the economists said. While comments from US and Indian officials last month had raised hopes that the steep 50% tariffs on Indian exports would soon be reduced, the lack of a concrete deal has weighed on the rupee.
The tariffs have dented trade and portfolio flows into equities, leaving the currency reliant on central bank interventions for support. Foreign investors have net pulled out over $16 billion from Indian equities over the year so far. India’s merchandise trade deficit hit an all-time high in October.