The Rupee (INR) seems to be gradually weakening towards the 85 per US Dollar (USD) mark. The domestic unit closed at yet another lifetime low, weighed down by a host of factors including importers’ rush to buy dollars, outflows from domestic equity markets due to net sale by foreign portfolio investor and the all-time high trade deficit in November.
The rupee closed at 84.9525 per USD, about 6 paise down against previous close of 84.8950, even as forex market traders eagerly awaited a decision by the US Fed on a likely rate cut.
Intra-day, the INR tested a high of 84.9550, with RBI putting brakes on further depreciation by intervening in the market through dollar sales.
Amit Pabari, MD, CR Forex Advisors, observed that the rupee remains under pressure as the Federal Reserve is anticipated to deliver a rate cut. However, market expectations for rate cuts in 2025 have declined, influenced by robust US economic data and potential policies linked to Donald Trump’s upcoming presidency in January.
“Thus the spotlight is now firmly on FOMC economic growth projections and the Dot Plot. These projections…are set to provide critical insights into the Federal Reserve’s outlook. Although not binding, it serves as a valuable indicator of future rate movements, helping investors gauge whether the Fed’s stance aligns with current market expectations,” he said.
Additionally, the Fed Chair’s remarks during the post-policy announcement will be pivotal in shaping market sentiment. Pabari sees the rupee trading within a range of 84.70 to 85.20 in the near term.
Asian currencies
V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank, emphasised that RBI still has the firepower to intervene in the market, given that it has assiduously built up forex reserves for a rainy day. So, the rupee has not depreciated as much as other Asian currencies, including the Chinese Yuan, have against USD in the last one-and-a-half months or so.
Asian currencies have depreciated after Trump’s threat to raise tariffs on imports from BRICS countries if they float 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 realisation of export proceeds in the hope of getting more rupees for the dollars they bring back later.
Radhika Rao, Senior Economist & Executive Director, DBS Bank, noted that market participants will continue to test the view of RBI’s new Governor on the currency, with the rupee at record lows.
“Prospect of further yuan/CNH weakness and high UST (US Treasury) yields have also kept the rupee under pressure. Allowing the currency to depreciate will help rein in the import bill, albeit the authorities might prefer to keep resultant volatility in check. In the interim, there is also market chatter that the RBI’s NDF (non-deliverable forward) short position has close to halved from the earlier rumoured $60 billion. DBS FX strategist sees scope for further rupee slippage over the next 3 months and 12 months horizon, beyond 86/dollar,” she said.
