What’s going on here?
The US is expected to cut interest rates next month, but the Indian rupee is likely to stay flat, unlike its emerging market peers.
What does this mean?
While Federal Reserve Chair Jerome Powell green-lit the anticipated rate cuts, the rupee remained largely unchanged. Other emerging market currencies like the Brazilian real, Thai baht, Indonesian rupiah, and Malaysian ringgit have all risen roughly 5%, thanks to the dollar’s decline. But the rupee hasn’t followed suit, which might be just the way the Reserve Bank of India (RBI) wants it. The rupee’s real effective exchange rate (REER) hit a nearly 7-year high of 107.3 in July, indicating a 7% overvaluation. HDFC Bank pointed out that this higher REER poses a risk to India’s export competitiveness, especially with the country’s merchandise trade deficit peaking at a 9-month high in July due to weak exports.
Why should I care?
For markets: Rupee’s resistance explained.
The rupee has dipped 0.7% this year, standing at 83.88 to the US dollar at 2:00 p.m. IST. Market watchers doubt the currency will breach the 83.50 level, anticipating RBI intervention to buy dollars and keep the rupee from strengthening too much. Analysts remain bearish on the rupee, even as optimism grows for most other Asian currencies, according to a Reuters poll.
The bigger picture: Strategic stability.
BNP Paribas India’s Akshay Kumar notes that despite the overall weakness of the USD, the RBI’s efforts have stabilized the rupee, allowing the REER to decrease. This strategic stability could help safeguard India’s export sector, even as broader market dynamics continue to shift.
