The rupee has been under pressure ever since Donald Trump has won the US presidential election, triggering capital outflow from India. But the rupee’s troubles are not just external. The local currency has been hitting a new low, and the 85-a-dollar level is a hair’s breadth away, as the Reserve Bank of India (RBI) is fast running out of steam to support the currency for long.
Trump’s economic policies are likely to stoke higher inflation resulting in higher bond yields in the US. This is also likely to delay more rate cuts by the US central bank.
The capital outflow from Indian and other emerging markets has also been caused by the expectation that Trump’s policies will benefit the US economy in the long run. Therefore, investors across the globe have been thronging to the country to pre-empt an equity and debt market bull run in future. The rupee is not getting much support internally too.
The domestic economy has been in a slow lane for over a quarter, and most analysts do not see any reversal in fortune in the current financial year. The over-stretched equity markets have also prodded foreign investors to look for markets where valuations are more in line with the economic realities.
These factors have kept the rupee under pressure, even if the volatility has been low. The rupee has shed 2 percent against the dollar in 2024, and the depreciation has been hastened by Trump’s victory.
The Indian currency that began the year around 83.2 a dollar level in January is now starting at the possibility of hurtling down to 85-86 levels by the end of next year. RBI has been intervening in the forex market, with reports suggesting that the central bank has taken a USD 100 billion bet (in the third quarter) to neutralise the volatility in the rupee following the US election results. However, the currency market is abuzz with the view that RBI’s bloated position in the non-deliverable forward (NDF) market is adding to the pressure on the rupee.
The RBI’s NDF position (over USD 60 billion) signals that the central bank has done its bit, and may find it difficult to defend the rupee for long given the way external and internal factors are panning out. The rupee, in the coming days, is set for more volatility with a downward bias. Prepare for the rupee at 85/dollar soon with 86 levels not far away.