Why is Indian rupee not strengthening despite weakening US Dollar?
The Indian rupee (INR) has remained stable, despite a weakening US Dollar and favorable global factors such as declining crude oil prices, and strong foreign institutional inflows (FII) into India's stock market. The US Dollar index has slipped nearly 5% to multi-month lows of around 101 level from a three-month high of 106.00. This drop is due to investors' anticipation of a significant interest rate cut by the US Federal Reserve next week.
Rupee's performance against other Asian currencies
While most Asian currencies have strengthened against the US Dollar, the INR has not followed suit. It has traded within a broader range, failing to capitalize on the Dollar's decline and other positive market conditions. Amit Pabari, MD of CR Forex Advisors, noted that despite supportive factors like potential US Fed interest rate cuts and consistent foreign institutional inflows into Indian stock markets, "the local currency has not appreciated; rather it remains weak against the US Dollar."
RBI's role in rupee's performance
The reason behind the rupee's lack of appreciation is attributed to the Reserve Bank of India (RBI)'s active intervention in the foreign exchange market, through substantial Dollar purchases. Pabari explained that "RBI has been absorbing most Dollar inflows into the economy." He further stated that "this consistent Dollar buying by the central bank has not allowed the rupee to appreciate."
Trade deficit and currency dynamics
The rupee has not depreciated beyond the level of 84 a Dollar, a strategy linked to India's high trade deficit with China and the strengthening Chinese yuan against the Dollar. Pabari highlighted that "Indian rupee is weakening against China's currency. This adds to India's trade deficit with China." He suggested that RBI likely keeps intervening to prevent further depreciation of the rupee.
Future projections for the rupee
Jigar Trivedi, Senior Research Analyst - Currencies & Commodities at Reliance Securities, noted that the range-bound movement continues in the rupee even after a weak Dollar and low crude oil prices. He stated that "the RBI is maintaining a firm grip on the domestic currency." According to Pabari, in the near term, the rupee is likely to trade within a narrow band of 83.80 to 84.05, while medium-term outlook slightly broadens this range to 83.70-84.05.
