The Indian rupee continues to face significant depreciation pressure, hovering near its lifetime low at 83.9750 against the U.S. dollar, despite intervention efforts from the Reserve Bank of India (RBI). The central bank’s ongoing involvement in the forex market has helped prevent the currency from breaking below the 84 mark, but challenges remain, driven largely by a shrinking balance of payments (BoP) surplus.
Key Factors Contributing to Rupee’s Weakness:
- RBI’s Intervention: The Reserve Bank of India has been actively intervening in the foreign exchange market, both buying and selling U.S. dollars to stabilize the rupee. Despite this, the rupee has remained in a narrow range, with its volatility among the lowest of major Asian currencies.
- Shrinking BoP Surplus: India’s balance of payments surplus, which stood at $63.7 billion last fiscal year, is expected to drop to $50 billion this year, according to IDFC First Bank economist Gaura Sen Gupta. This reduction in the BoP surplus is a key driver of the rupee’s depreciation. The RBI has already net sold more than $2 billion from April to August 2023, compared to a net purchase of $19 billion in the same period last year.
- Global Economic Conditions: The Indian rupee has not followed the broader rally seen in other Asian currencies, largely influenced by expectations that the U.S. Federal Reserve will soon begin cutting interest rates. However, despite a weakening U.S. dollar, the rupee has struggled due to the domestic challenges posed by the BoP imbalance and strong demand for the dollar.
- Market Sentiment and Dollar Demand: A treasury official from a local bank pointed out that demand for the U.S. dollar has outweighed supply in recent months, contributing to the rupee’s ongoing struggles. Despite intervention by the RBI, the dynamics of the forex market have shifted in favor of the dollar, pressuring the rupee.
The Indian rupee’s current trajectory reflects broader economic challenges, particularly a shrinking balance of payments surplus and global market dynamics. While the RBI’s intervention has helped prevent further depreciation, the currency remains vulnerable to external pressures. Continued monitoring of global interest rate movements and India’s BoP position will be critical in assessing the rupee’s future performance.
