9th consecutive decline! Indian rupee hits record low of ₹85.73/dollar
The Indian rupee has witnessed a sharp fall against the US dollar, hitting a fresh low of ₹85.73 on Friday. This is the currency's ninth straight day of decline, largely due to strong dollar demand in the non-deliverable forwards (NDF) market. This year, the rupee has fallen 3% against its American counterpart and is set to post annual losses for seven consecutive years.
Factors contributing to rupee's depreciation
The expiry of the December currency futures contract has led to heightened dollar buying, according to Reuters. A forex trader said they expect a spike in activity from importers toward the month-end. Nuvama Institutional estimates by March end, the rupee could touch ₹86 against the dollar. Meanwhile, Kotak Securities says it may even exceed this level.
RBI's stance and liquidity issues in banking sector
The Reserve Bank of India (RBI) has not officially communicated any changes to its intervention strategy in the forex market under new Governor Sanjay Malhotra. Market participants informed Reuters that due to tax outflows and RBI's foreign exchange intervention, the liquidity deficit in the banking system is now at its highest level in nearly seven months.
Expert views on RBI's intervention and liquidity situation
A Prasanna, head of research at ICICI Securities Primary Dealership, suggested the rupee should be allowed to move in line with fundamentals. He warned against depleting reserves and exacerbating the liquidity situation. Christopher Wong from Oversea-Chinese Banking Corp echoed these sentiments, saying intervention could only slow down currency depreciation. Alan Lau from Malayan Banking Berhad said poor liquidity is exacerbating weakness and creating exaggerated moves due to thinner liquidity in December.
rupee's performance amid global economic uncertainties
Despite its depreciation, the rupee has performed relatively well against other emerging market currencies. For FY25 (till November 30), it has remained largely stable, displaying low volatility against G20 counterparts. The rupee witnessed a modest decline of 1.2% since April 2024, outperforming the South Korean Won and Brazilian Real which weakened by 2.2% and 12.7% against the dollar, respectively.
Impact of trade deficit and global demand on rupee
The rupee's fall has been impacted by an unexpectedly large widening of the November trade deficit to a record high of $37.8 billion. India's export growth has been affected by a fall in global demand, while imports remain elevated. The Finance Ministry highlighted risks to global growth and uncertainty over global trade in 2025 due to possible tariff hikes by the incoming Donald Trump administration in January.
