The Indian rupee sank to an all-time low on Friday, breaching the 84-per-dollar mark for the first time, as concerns over rising oil prices and foreign capital outflows weighed on the currency. The rupee was quoted at 84.07 per US dollar, marking a historic low of 22.8998 against the UAE dirham.
This decline marks a significant breach, as the Reserve Bank of India (RBI) had been defending the 84 level for over two months. While the rupee had previously recovered to 83.50, recent global and domestic developments have worsened its outlook.
Key Factors Pressuring the Rupee:
- Rising Oil Prices: The ongoing conflict in the Middle East has driven up crude oil prices, which climbed by over 10% in October. As India is a major oil importer, rising prices increase the country’s trade deficit, exerting downward pressure on the rupee.
- Foreign Outflows: Overseas investors have been pulling out of Indian equities for nine consecutive sessions, further exacerbating the currency’s decline. Concerns over global economic conditions have led to a flight of foreign capital from India’s equity market, hurting the rupee’s stability.
- Diminished Hopes for US Rate Cuts: Expectations for a large rate cut by the US Federal Reserve have also weakened. Following a robust US jobs report, the chances of a 50 basis point rate cut in November have diminished, with most bets now leaning toward a 25 basis point cut. This development has made the US dollar more attractive, putting further pressure on the rupee.
RBI Interventions:
The Reserve Bank of India has been actively intervening to protect the rupee, repeatedly instructing banks to avoid placing heavy bets against the currency. Despite these efforts, the rupee’s sharp decline reflects persistent challenges, including a widening trade deficit and inflationary pressures.
India’s balance of payments has deteriorated, with the trade deficit reaching a 10-month high of $23 billion in August, driven by a rise in gold imports and a slowdown in exports. Meanwhile, a marginally higher-than-expected inflation rate in September added to the rupee’s woes.
Regional Currency Comparison:
While other Asian currencies have appreciated by 0.3% to 4.9% over the past two months, the rupee has remained nearly flat, highlighting its underperformance in the region. The current account deficit has also widened to $9.7 billion (or 1.1% of GDP) in the April-June quarter, contributing to the rupee’s continued weakness.
As global economic headwinds persist, market analysts expect the Indian rupee to remain volatile in the near term, with the RBI’s monetary policy and global crude oil prices playing critical roles in determining its future trajectory.
