The rupee (INR) appears to be gradually weakening towards the 85 per US dollar (USD) mark. The domestic unit closed at a new low, pressured by a host of factors, including importers’ rush to buy dollars, outflows from domestic stock markets due to net selling by foreign portfolio investors and November’s all-time trade deficit.
The rupee closed at 84.9525 per USD, around 6 paise lower than the previous close of 84.8950, as forex market traders eagerly awaited a US Fed decision on a likely rate cut.
During the day, the INR tested a high of 84.9550 with the RBI curbing further depreciation by intervening in the market through dollar selling.
Amit Pabari, MD, CR Forex Advisors, noted that the rupee remains under pressure as the Federal Reserve is expected to implement a rate cut. However, market expectations for rate cuts in 2025 have fallen, driven by robust US economic data and potential policies related to Donald Trump’s upcoming presidency in January.
“So the spotlight is now firmly on the economic growth projections from the FOMC and the Dot Plot. These projections… will provide critical insights into the Federal Reserve’s prospects. While not binding, it serves as a valuable indicator of future interest rate movements, helping investors gauge whether the Fed’s stance is in line with current market expectations,” he said.
Moreover, the Fed Chairman’s comments during the post-policy announcement will be critical in shaping market sentiment. Pabari expects the rupee to trade within a range of 84.70 to 85.20 in the near term.
Asian currency
V Rama Chandra Reddy, head of finance at Karur Vysya Bank, emphasized that RBI still has the firepower to intervene in the market as it has been diligently building up foreign exchange reserves for a rainy day. So the rupee has not depreciated as much as other Asian currencies, including the Chinese Yuan, against the USD over the past month and a half.
Asian currencies have fallen in value following Trump’s threat to raise tariffs on imports from BRICS countries if they introduce a common currency for trade.
Reddy noted that importers are rushing to buy dollars fearing further depreciation of the rupee, while exporters are holding back the realization of export earnings in the hope of getting more rupees for the dollars they bring back later.
Radhika Rao, senior economist and executive director of DBS Bank, noted that market participants will continue to test RBI’s new governor’s views on the currency as the rupee is at a record low.
“The prospect of further yuan/CNH weakness and high US Treasury yields have also kept pressure on the rupee. Allowing the currency’s depreciation will help rein in the import bill, even though authorities may prefer to control the resulting volatility. In the meantime, there are also rumors in the market that the RBI’s NDF (non-deliverable forward) short position has almost halved from the previously rumored $60 billion. DBS FX strategist sees scope for further decline in the rupee over the next three months and a 12-month horizon, above 86 per dollar,” she said.
