The Indian rupee slipped to fresh lows despite the blowout GDP number. The currency continued to trade significantly below the 89.50/$ mark as FII outflows, uncertainty about the US-India trade deal overshadowed the strong Q2 GDP print. The currency slipped well past its previous low of 89.49/$ that it had hit in November.
3 reasons why rupee declined?
The drop came despite the blockbuster Q2 GDP data. The economy expanded 8.2% in Q2, significantly above the overall expectation of 7.3-7.5% growth. Bankers, as quoted by Reuters, 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.
1. Delays in US trade deal puts rupee under pressure
The continuous delay in the US-India trade and the uncertainty as a result of the future of exports is creating a stir across the market. Most money market observers believe that the longer there is no trade deal, the greater the onus on rupee depreciation to provide that offset.
There have been some commentary about the talks progressing, but per se there has been no concrete decision that has been announced. The expectation is that of a trade deal being announced before the year is out. As a Reuters report on the currency pointed out, the tariffs have dented trade and portfolio flows into equities, leaving the currency reliant on central bank interventions for support.
2. FII outflows weigh on sentiment
Foreign investors have net pulled out over $16 billion from Indian shares over the year so far. They have been net sellers in equity over the last 5 months. This along with the October trade deficit at all-time highs created a sense of worry among investors. Additionally, the Dollar Index hovering around the 99 mark further kept foreign investors away from taking fresh positions in the Indian market.
3. Balance of payment, nominal GDP not supportive
While that is not a direct mandate, many economists also pointed out that they were waiting for a better balance of payments backdrop that might alleviate any financial stability concerns arising out of further monetary easing. As per September data, India’s current account deficit (CAD) narrowed to 0.2 per cent of GDP during Q1FY26. Moreover, the Q2 nominal GDP is another cause for worry. It remained subdued around the 8.7% levels, well below the 2-year average of 10%. The combination of weak nominal GDP and capex trailing pointed to key worry points for the economy. This also weighed on sentiment.
