The Indian rupee experienced a significant drop on Wednesday, reaching its weakest closing level on record against the U.S. dollar. The local currency ended the day at 84.08 against the U.S. dollar (USDINR), slightly weaker than its previous session’s close of 84.0775. This marks a new low for the rupee as it struggled to keep pace with a buoyant dollar. Despite the decline, the rupee outperformed several of its Asian counterparts, helped in part by dollar sales from state-run banks that tempered sharper losses.
The dollar index rose by 0.2%, touching a peak of 104.37, the highest level since early August. Several Asian currencies declined within a range of 0.1% to 0.5% as the greenback maintained its strength amid increasing optimism surrounding the upcoming U.S. presidential election and the economic outlook.
Investors have been closely watching the U.S. political landscape, with Donald Trump’s chances of a victory in the presidential election boosting the dollar and U.S. bond yields. A Trump win, along with a potential “Red Sweep” where Republicans take control of Congress, would enable him to implement aggressive fiscal policies, which would likely strengthen the dollar further. This scenario has driven up demand for U.S. assets, as reflected in the rise of the 10-year U.S. Treasury yield to a three-month high of 4.24%.
According to a note from MUFG Bank, a Trump victory coupled with a Republican-led Congress would be the most bullish outcome for the U.S. dollar, at least in the short term, as markets anticipate fiscal policies that would push bond prices lower and yields higher.
In addition to election speculation, the Federal Reserve’s stance on interest rates has also impacted the market. Investors have recalibrated their expectations, now betting on a gradual reduction of interest rates, which has further bolstered the dollar and weighed on currencies like the Indian rupee.
While Asian currencies such as the offshore Chinese yuan and South Korean won have seen increased volatility ahead of the U.S. election, the rupee is expected to remain relatively stable due to the Reserve Bank of India’s (RBI) regular interventions. The central bank has a history of stepping in to prevent outsized moves, which has helped mitigate the impact of external pressures.
The rupee’s relative resilience compared to other regional currencies is also due to dollar sales by state-run banks. These actions have cushioned the local currency from experiencing sharper declines, even as India witnessed significant capital outflows. In October alone, foreign investors have withdrawn over $8.5 billion from Indian equities, creating additional pressure on the rupee.
Despite the support provided by the central bank, Indian stock markets have also felt the impact. Benchmark equity indices ended slightly lower on Wednesday, marking their third consecutive day of losses. The decline in equities reflects broader concerns about the global economic outlook, the upcoming U.S. election, and domestic inflation risks.
Looking ahead, analysts expect the RBI to continue monitoring currency movements closely and to intervene as necessary to prevent excessive volatility. However, with the ongoing uncertainty surrounding the U.S. election and the evolving monetary policy landscape, the rupee may face further challenges in maintaining its stability.
