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The RBI could step up intervention, which would mean selling dollars in the local markets more aggressively. Market estimates, however, suggest that rupee could fall further to 87-88 per dollar in the coming days
At present, the RBI’s options to contain the rupee’s decline are limited, given the overwhelming geopolitical factors.
The freefall of Indian Rupee against US Dollar in the past few days is primary due to better-than-expected US jobs data, which could mean that the Federal Reserve could go for lesser interest rate cut this year. Crude oil prices and continued outflows from foreign investors also led to the depreciation of the rupee.
According to forex dealers, the Reserve Bank of India is allowing the rupee’s value to fall over the past few days.
On Monday, the rupee recorded its sharpest single-day fall in two years, closing at Rs 86.50 and hitting an intraday low of Rs 86.58 against the USD. Its drop was larger than the declines experienced by other Asian currencies, such as the Thai baht, the Philippine peso, and the Malaysian ringgit, which fell between 0.3% and 0.6%.
Why Is The Rupee Weakening?
Offshore investors turned sellers of about $2.8 billion of equities so far in January, following comparable net purchases of $1.8 billion last month, as geopolitical uncertainties strengthened dollars against riskier currencies.
Global oil prices jumped to the highest levels in five months on concern that US sanctions on Russia would squeeze crude supplies.
Meanwhile, rising US debt yields too boosted demand for dollar-denominated assets, triggering capital outflows from emerging markets like India. The ripple effect has been significant, with around $4.2 billion exiting Indian markets in January 2025 alone. Yields on 10-year US Treasuries touched the highest since November 2023 following the newest jobs data for the world’s biggest economy.
The US jobs report on Friday was higher than market consensus. Headline Non-farm Payroll (NFP) print came in at 256,000 against expected 160,000. Even the unemployment rate came down to 4.1% from 4.2%.
Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, was trading 0.27% higher at 109.95. The 10-year US bond yields also rose to 4.71%.
What Is RBI Doing To Arrest Depreciation?
At present, the RBI options to contain the rupee’s decline are limited, given the overwhelming influence of global geopolitical factors. It has adopted a more measured approach this time.
While reportedly selling dollars, the RBI acted in tandem with the market rather than attempting to defend specific levels like Rs 86, Rs 86.25, or Rs 86.50. This lack of aggressive intervention allowed speculators to drive the rupee lower.
The central bank sold $60 billion between the last week of September and December 20. To mitigate the liquidity impact due to USD selling, the RBI has reduced CRR by 50 basis points in its latest monetary policy review. It has also taken short positions in the non-deliverable forward market, as per a report by The Economic Times.
“Amounts of RBI interventions in January have about halved from levels in December,” according to Anil Kumar Bhansali, executive director at Finrex Treasury Advisors, a foreign exchange risk management firm, told ET Now. “The key reason is RBI’s assessment the local currency may be overvalued, so they have the comfort of letting the rupee depreciate further. The RBI had accumulated short positions in the dollar, which they are slowly unwinding since end December.”
Though the RBI intervention has reduced rupee volatility, it has led to its overvaluation in REER (Real Effective Exchange Rate) terms. REER reflects the export competitiveness of a country.
Rupee was 8% overvalued in REER terms in November, as per the RBI. Such appreciation would worsen the trade deficit. Thus, experts believe less RBI intervention in the future.
Will Rupee Fall Further In The Coming Days?
Historical data shows that the rupee has depreciated by 2-5% annually in several years. Since 2019, the average annual depreciation has been 3.3%.
If the rupee depreciates by 3% in 2025, it would reach Rs 88 per dollar, aligning with past trends, as per a report by CNBC TV18.
Market estimates suggest the rupee could fall further, with Standard Chartered projecting a year-end level of Rs 87.75.
Brad Bechtel, global head of foreign exchange at Jefferies, told Reuters that the rupee’s continued depreciation aligned with its real effective exchange rate (REER). The rupee’s 40-currency trade-weighted REER indicates it is at its most overvalued level in at least two decades, he added.
Bechtel expects the rupee to weaken to 88 in the near-to-medium term, while ANZ Bank forecasts the Indian currency to reach that level by March.
Jayesh Mehta, VC & CEO of DSP Finance, also stated that a ballpark estimate for the rupee could be around Rs 88-89 per dollar.
Bank of America has forecasted no Federal Reserve rate cuts in 2025, and Indian banks such as HDFC Bank and Standard Chartered have similarly indicated no expectations of an RBI rate cut in February.
However, Citi expects rate cuts to begin from February, driven by moderating inflation. The baseline projection is that February will mark the start of rate cuts, as inflation numbers are moderating significantly.
What’s The Impact On Economy?
A weak rupee increases the import bill. Cost of import of edible oils, pulses, fertilisers, oil and gas also rises.
India’s import dependency on crude oil was 88.1% between April and November 2024, compared to 87.6% in the corresponding period of the previous year.
A depreciating rupee also worsens government deficit. India’s trade deficit touched an all-time high of $37.8 billion in November 2024, compared to $20.7 billion in November 2023.
Inflation will rise as the cost of imported goods increase. The impact of the rupee frefall can be felt on the overall economic growth, creating upward pressure on interest rates.
