Market participants see a marginal depreciation in rupee as the likely intervention from the Reserve Bank of India (RBI) will keep the sharp volatility in the forex market at bay.
According to the median forecast of the FE poll, the rupee is expected to be trading at 84.50 per dollar by December end. On Tuesday, it hit another fresh low of 84.414. During the day, it hit an all-time low of 84.427.
Market participants highlighted that firm dollar index, lower balance of payment surplus for the FY25 and the weakness in China’s yuan will maintain depreciation pressure on rupee.
For the September quarter, the balance of payment surplus for India was negative due to the rise in trade deficit. Moreover, the continuous foreign outflows from equities will also add an another layer of pressure on the rupee.
So far in November, the rupee has depreciated 0.4% against the greenback due to the strengthening of dollar index and the rise in US Treasury yields after Donald Trump won the US Presidential elections. Since the first rate cut by the US Fed and Trump’s victory, the rupee has remained under pressure. However, the RBI’s active intervention has checked any sharp downward movement. The rupee fell to 84.41 on November 19 from 84.11 on November 5.
“If the yuan depreciates beyond 7.30%, it may lead the rupee to hit 85 per dollar. A gradual depreciation in the rupee is to maintain appropriate gap between the interest rate differential, which is 1.5-2% (an ideal percentage of depreciation in a year), vis-à-vis other emerging market currencies,” said VRC Reddy, deputy general manager at Karur Vysya Bank.
“Uncertainty on front of policy changes in the US, dollar strength will remain supported, FPIs outflows will continue as they close their books in December, and with depreciation pressure on CNH, the pressure on other emerging currencies is likely to sustain,” said Gaura Sen Gupta, chief economist at IDFC First Bank. “RBI is smoothening the upward trajectory in the USD-INR instead of allowing for any sharp movement. RBI will continue to use its forex reserves to make the upward movement in INR more gradual,” she added.
After the US CPI data, released on Thursday, the dollar index rose to 106.7%. The dollar index measures the strength of the greenback against a basket of six major currencies. The US inflation has remained sticky. The latest reading showed that rise of 2.6% year on year in the headline CPI data and a 3.3% rise in core CPI. The yield on the benchmark 10-year US Treasury bonds rose by 20 basis points so far in November.
Meanwhile, with the RBI’s continuous support, the rupee outperformed its Asian peers in November so far and is expected to remain one of the best performing Asian currencies. RBI has sold $29 billion of forex reserves likely to limit the depreciation of rupee. Its foreign exchange reserves fell for six consecutive weeks as per the latest data by the central bank. As on November 8, the forex kitty of the central bank stood at $675.7 billion. The Indian unit has depreciated by 1.2% in the current financial year so far. While in the current calendar year, it has depreciated by 1.5%.