Friday’s sharp depreciation in the rupee dragged the currency all the way to 89.40 vis-à-vis the dollar. That’s a clear message to the markets—they should not expect the Reserve Bank of India (RBI) to keep supporting the Indian currency. The all-time low, it appears, was because stop-losses were triggered on short dollar positions amidst local demand for the US currency, which has been appreciating in the past three days. Hoping that a trade deal with the US would be finalised soon, some players had apparently bet on the rupee appreciating in the near term. In fact, on Thursday, Governor Sanjay Malhotra had said the pressure on the rupee would ease once a “good” trade deal with the US was signed. However, if the markets were hoping that the RBI would intervene, they have only themselves to blame. No levels are really sacrosanct, not even 89 to the dollar, and the markets must understand this. They clearly believed otherwise because going by reports, most of the stop-losses were triggered when the 88.8050 level—the previous record low—was breached.
Market Miscalculation
Indeed, one cannot fault the RBI for not supporting the currency or holding it an specific level. There is no certainty on when a trade deal with the US will be clinched. Already, the RBI’s interventions in the currency market have deprived the money markets of liquidity leading to a deficit in the system on a few occasions. The central bank’s foreign exchange reserves have dropped around $10 billion since mid-September, according to official data cited by Bloomberg. It’s better to save the ammunition than exhaust precious reserves to shore up the rupee at this point. Economists point out that in terms of the real effective exchange rate, the rupee is more or less fairly valued. On Friday, the central bank reportedly stepped in to support the rupee only at levels of 89.40.
Weaker Rupee
To be sure, importers with unhedged dollar exposures would be in trouble but they have only themselves to blame. Companies that have dollar earnings of course will see a boost to their bottom lines. The rupee could continue to trade at these levels or fall further if the dollar strengthens even more; the one-month offshore rate fell as much as 1% to 89.86 on Friday. To be sure, an India-US trade deal should see exports to the US bouncing back and cushioning the merchandise trade deficit which, in October, widened to a record high of $41.7 billion from an already elevated $32.2 billion in September, well above expectations.
There’s no cause for alarm although a weaker rupee would, no doubt, push up the import tab especially as the country will now be importing less of the cheaper crude oil from Russia. However, on the plus side, exports should become more competitive, allowing exporters to gain share from their rivals. In FY26 so far, the rupee has depreciated by 4.4% which is way more than the fall in the Bangladeshi taka and the Vietnamese dong, the two countries that India competes with in the world market. A weaker rupee might also bring in more foreign flows. Even otherwise, with services exports remaining resilient, we should not see too much of a spike in the current account deficit.
