The Indian rupee reached an all-time low on Monday, weighed down by regional currency weaknesses and continued outflows from local equities.
However, intervention by the Reserve Bank of India (RBI) helped mitigate the extent of the rupee’s decline. The currency ended the day at 84.3925 per dollar, surpassing its previous record low of 84.3875 set last week. On the day, the rupee weakened by 0.02%.
Traders noted that demand for dollars, particularly from oil companies and foreign banks acting on behalf of custodial clients, put pressure on the rupee. In addition, ongoing foreign investor outflows, which have totaled around $2.5 billion in November, contributed to the rupee’s decline. This followed a significant $11 billion outflow in October, further dampening market sentiment.
While Indian stock indices, such as the BSE Sensex and Nifty 50, ended nearly flat, the overall market sentiment was subdued by broader trends in the global currency markets. Asian currencies fell by 0.1% to 0.6%, with the dollar index rising 0.3% to 105.3, nearing a four-month high. The offshore Chinese yuan also weakened by 0.2% to 7.21, after a stimulus package announced by China failed to meet investor expectations.
The strengthening of the US dollar has been fueled by expectations that US inflation and bond yields may rise due to policies under President-elect Donald Trump. Analysts predict that the dollar will continue to appreciate into the year-end, with ING Bank projecting that the dollar index could consolidate between 104.5 and 105.5 before potentially pushing higher.
Despite the rupee’s new record low, the currency has remained relatively stable compared to other emerging market currencies, largely due to the RBI’s proactive measures. India’s central bank has been using its substantial foreign exchange reserves—among the largest globally—to limit extreme fluctuations in the rupee’s value. The RBI’s intervention aims to ensure that the rupee does not experience sharp declines, while also allowing for gradual depreciation in line with the Chinese yuan.
The economic implications of a weaker rupee are being closely watched. A depreciating rupee may widen India’s trade deficit, particularly with China, which has been a growing concern. The country’s trade deficit with China has doubled in the past three years, reaching nearly $83 billion in 2023. As China faces further currency pressure under the new US administration, India could find itself navigating a more challenging trade environment.
Analysts are revising their forecasts for the rupee, with some predicting that it could breach the 85 mark within the next year. HDFC Bank expects the rupee to hit 84.50 before its earlier forecast for March, as the currency continues to be affected by both domestic and global factors. However, the central bank is likely to maintain a stance that avoids excessive depreciation, recognizing the importance of keeping the rupee competitive, especially in light of a weaker yuan.
India is keen to boost its manufacturing sector and attract businesses looking to relocate supply chains from China. To make this a reality, the country’s policymakers must ensure that the rupee remains competitive against its peers. With the yuan weakening, the RBI may allow a gradual depreciation of the rupee in the coming months to maintain export competitiveness and continue to capitalize on shifts in global trade.
