Context:
The rupee plummeted to a two-week low upon closing at 87.34 to the US dollar, down 0.52% from the previous close of 86.88.
Reasons Behind Rupee Depreciation
On-Going Strong Demand for Dollars in the NDF Market
- In the NDF market, there was strong demand for the dollars without deliverability due to maturities of $34 billion against the rupee.
- This was downward historical rupee pressure in weakness, as it became the worst-performing currency in Asia.
Limited Effect from RBI Intervention
- The aforementioned RBI intervention was carried out in the morning between 87.30 Rs. and 87.35 Rs. in order to manage the rupee volatility and to gainfully exit the market for the time being on this subject.
- However, the further weakening of the rupee was sustained as no intervention was visible during the day.
General Broader Market Trends and Other Global Factors
- The dollar index, meanwhile, declined near a 4-month low (103.7) in response to soft US employment data and uncertainties arising from geopolitical vulnerabilities to the global markets.
- The offshore Chinese yuan was down 0.2% on the back of deflationary worries emanating from China, thus pouring further negative weight on the Asian currencies.
- Added to this was the concern over any retaliatory tariffs that the U. S. may impose on the imports from India, further compounding the downside risks.
Consequences for the Indian Markets and Economy
- Increased Import Costs
- While the expense of import items such as crude oil is nearly doubled by depreciation of the rupee, inflationary considerations come into play.
- Action on the Part of the RBI
- The interventions of the RBI would be more pronounced in the presence of hovering volatility.
- FII Outflows
- Continuous FII sales are limiting rupee appreciation in the near term.
Outlook
In contrast, any intervention on the part of the RBI will stabilize the rupee if global risk sentiment improves. Debt holders will closely monitor U.S. trade policy and FII trends, since they will play a critical role in determining the movement of the rupee in the coming weeks.
