The Indian rupee fluctuated within a narrow range on Monday, as sustained demand for dollars in the interbank market muted globally positive market sentiments. Throughout the year, the rupee has struggled, impacted by stagnant discussions regarding a trade agreement with the United States and ongoing foreign fund outflows. As a result, it has emerged as Asia’s worst-performing currency.
Analysts from Nomura and S&P Global Market Intelligence predict that the rupee may drop to 92 against the dollar by the end of March, emphasizing that any potential strengthening depends significantly on advancements in trade relations with the U.S. The currency was recently trading at 89.6 against the dollar.
Hanna Luchnikava-Schorsch, head of Asia-Pacific economics at S&P Global Market Intelligence, pointed out that the rupee currently appears undervalued. She anticipates a correction once there is clearer progress in the U.S.-India trade discussions. Over the next six months, S&P Global expects the likelihood of a trade deal to improve, as India’s high tariff rates, currently averaging 50%, drastically outpace those imposed on China. Ongoing negotiations between New Delhi and Washington continue to stall, contributing to the unfavorable economic climate.
The imposition of steep tariffs that began in August resulted in a significant decline in Indian exports to the U.S., falling nearly 12% in September and 8.5% in October. However, the figures saw a rebound in November, increasing by 22.6%. Sonal Varma, chief economist for India and Asia ex-Japan at Nomura, warns that prolonged tariffs could hinder India’s supply chain momentum, particularly for companies primarily serving the U.S. market. She cautioned that ongoing uncertainty resulting from high tariffs has triggered foreign portfolio outflows, further putting pressure on the rupee, which could in turn raise import costs and inflation.
Conversely, a weaker rupee might bolster India’s export competitiveness, especially given the low domestic price growth that could mitigate the impact of rising import costs linked to currency depreciation. Earlier this month, the rupee crossed the psychologically significant 90-mark against the dollar, after starting the year at 85.64. The Indian currency reached the 91-rupee mark within just 15 trading sessions.
Foreign investors have generally adopted a bearish stance towards India this year, leading to net outflows exceeding $10 billion across various investment sectors. This trend is underscored by data from the securities depository NSDL. Despite the concerning currency fluctuations, analysts believe that the current account deficit remains manageable, estimated between 1% and 1.5%, according to Somnath Mukherjee, CIO and senior managing partner at ASK Private Wealth. He indicated that the rupee is likely to remain under pressure until foreign portfolio investment flows can be reversed.
Outflows have particularly affected Indian equities, with foreign portfolio investors net sellers, withdrawing nearly $18 billion as of December 19. Luchnikava-Schorsch described the depreciation of the rupee as a “double-edged sword” for foreign institutional investors. While it might present an advantageous entry point for Indian equities, it raises concerns regarding protracted currency weakness, trade policy uncertainty, government finances, and overall growth prospects.
In response to the currency’s volatility, India’s central bank, during a recent monetary policy meeting, reiterated its commitment to allowing market forces to dictate exchange rates. Reports suggest that the central bank intervened “aggressively” to stabilize the rupee’s decline on Wednesday.
