Indian rupee at lifetime low: Will RBI step in?
What’s the story
The Indian rupee just slipped to a record low of 88.3 per US dollar, continuing its recent losing streak. This drop is mainly due to US tariffs and big withdrawals by foreign investors.
The sharp depreciation has unsettled financial markets, prompting banks to reduce their trading exposures.
Importers with unhedged positions and corporates reliant on forex derivatives are bracing for potential losses, as the sustained weakness in the currency heightens risks across trade and financial operations.
Financial sector divided on RBI’s stance
The financial sector is divided over whether the Reserve Bank of India (RBI) will allow further rupee depreciation to help exporters suffering from US tariffs.
“It will be interesting to see how far RBI is willing to allow rupee depreciation,” said Haresh Desai, market veteran and founder of Rajwade Treasury Consultants.
Analysts suggest RBI may not aggressively sell dollars
With inflation currently under control, analysts suggest the RBI may not resort to aggressive dollar selling.
Samir Lodha, former banker and MD of corporate advisory firm QuantArt, noted that “while there was some month-end demand,” the rupee breached 88 possibly because “RBI stepped back.”
He added that if left entirely to the market, these levels would have been seen a week earlier.
US non-farm payroll report’s impact on rupee
The upcoming US non-farm payroll report on September 5 is also crucial. A downward revision could prompt US interest rate cuts, possibly aiding the rupee.
“In August 2024, the revised number was lower than what was initially reported. Traders are waiting to find out if that will happen this year too,” a senior banker said.
Weaker rupee could aid exports, increase government dividends
A weaker rupee could make exports more competitive and increase RBI’s surplus for government dividends, especially in light of fiscal pressures from the 8th Pay Commission and GST cuts.
However, it’s unclear where the RBI will intervene to support the currency, which is often determined by the views of its key officials.
The central bank may see the 50% US tariff as temporary with a resolution expected within months.
Rupee has become weaker under Malhotra’s leadership
Under RBI Governor Sanjay Malhotra’s leadership, the rupee has become weaker, falling over 3.3% from March’s rate of 85.47.
During Shaktikanta Das‘s tenure as governor, the financial sector had expected only minor fluctuations in the rupee.
This expectation influenced importers’ derivative strategies for dollar purchases and any changes to this pattern could impact companies but not as much as previous derivative-related losses.
Source: www.newsbytesapp.com