Rupee's record low driven by tampered trade deal expectations, RBI's greater tolerance for volatility: Goldman Sachs

Disclaimer This is an AI-assisted live blog with updates from multiple sources Disclaimer

At previous close, the Sensex was down -31.46 points (-0.04 percent) at 85,106.81, and the Nifty was down -46.20 points (-0.18 percent) at 25,986.0

The Indian rupee plunged to a new record low of 90.40 against the US dollar, marking a sharp 2% depreciation in the last two weeks alone. This steep move has been driven by a confluence of factors, including a shift in the central bank's currency management strategy and a weaker external environment, according to Kamakshya Trivedi, Chief FX & EM Strategist at Goldman Sachs.

In an interview with CNBC TV18, Trivedi explained that the rupee's recent weakness, which was steeper than his firm had anticipated, is attributable to several developments. "I think there's a couple of things going on here. After a little bit of a better inflow picture into Indian equities in October, you've seen a little bit of a flattening out there," he noted. Additionally, expectations for an imminent US-India trade deal have been tempered. A crucial factor, however, is a perceived change in the Reserve Bank of India's (RBI) approach. "There definitely seems to be a greater willingness to accept volatility in the in the rupee… that tolerance for greater volatility, certainly on the weak side, seems even greater than we had anticipated," Trivedi stated.

The weakening external position has also played a significant role. The spike in the current account deficit (CAD) to 1.3% in the September quarter, up from 0.3% in the previous quarter, confirmed this. Trivedi pointed out that the impact of tariffs has been worse than expected and forward-looking indicators, such as new export orders in the Purchasing Managers' Index (PMI), have been at their weakest in months. He argued that currency weakness is a natural way for the economy to adjust to such external shocks.

This adjustment is being facilitated by India's benign inflation outlook. Trivedi highlighted that low inflation may have given policymakers at the RBI the confidence to allow for currency depreciation to offset the tariff impact without risking imported inflation. Consequently, Trivedi does not believe the rupee's fall will prevent the RBI from cutting interest rates in its upcoming policy meeting. "A weaker currency is the most natural way to adjust to those shocks. So I don't think that should stop the RBI from cutting rates. We think that they will cut rates," he affirmed.

Despite the sharp fall, Trivedi cautioned against viewing the rupee as a compelling buy at current levels. He explained that the currency was starting from an overvalued position and the recent depreciation has only brought it to a "small undervaluation," which may not be sufficient to attract significant buying interest on its own. Instead, he expressed optimism that India's strong underlying macro fundamentals, such as solid growth and low inflation, will eventually attract equity inflows, which in turn will help stabilise the currency. Goldman Sachs has recently upgraded its stance on Indian equities.

Given the new policy environment, Goldman Sachs is reassessing its earlier forecast of the rupee appreciating to 86.50 in 12 months. Trivedi now suggests that stability is a more likely outcome than a sharp appreciation. "Given past behavior, I think stability is more likely than a sharp appreciation of the kind that we had forecast," he said. On the global front, Trivedi expects the US dollar to weaken further.