Rupee recovers on RBI support after testing new low of 85.81, still falls most in seven months

FILE PHOTO: The Indian Rupee logo is seen inside the Reserve Bank of India (RBI) headquarters in Mumbai, India, December 6, 2024. REUTERS/Francis Mascarenhas/File Photo

The Rupee partially recovered from a fresh low of 85.81 against the greenback on December 27 to settle at 85.53, extending the fall for the ninth day in a row. This was the worst single-day fall for Rupee since June 4, weighed down a strong month-end demand for dollar in the non-deliverable forwards (NDF) market.

However, the Reserve Bank of India (RBI) stepped in towards the close, helping in the recovery.

For the year so far, the Rupee has weakened by 3% against the US dollar, and is set to post annual losses for seventh year in a row. On a monthly basis, the Rupee is poised to see its worst month in two years. The rupee fell nearly 0.3% on the week, its eight consecutive weekly fall.

With this fall, the INR broke below the psychologically key level of 85.50 for the first time. The expiry of December currency futures contract is also seen behind the dollar buying, reported news agency Reuters quoting a forex trader, who saw 'expected higher activity from importers at this time of the month.'

Nuvama Institutional has projected that the Rupee could hit 86 against the dollar by end of March, while Kotak Securities says it might breaching that level too.

Where is the Rupee headed?

Expert View

Reuters spoke to market participants who said that the liquidity shortfall in the banking system is now at the highest level in nearly seven months, because of tax outflows and RBI's foreign exchange intervention. "The first thing should be allowing the rupee to move in line with fundamentals and to not waste your reserves and create a further hole in the liquidity situation," it quoted A Prasanna, head of research at ICICI Securities Primary Dealership.

Read More: Mid-day Mood | Nifty, Sensex off highs but still in the green

Bloomberg News recently quoted Oversea-Chinese Banking Corp's currency strategist Christopher Wong saying, “Intervention in such an environment can only slow the pace of currency depreciation. Despite that, central banks may still have to use a mix of verbal and actual intervention tools.” The same report quoted Alan Lau, a FX strategist at Malayan Banking Berhad saying poor liquidity is amplifying the weakness. “The bullish dollar climb has been supported by the Fed’s tilt to be less dovish but the thinner liquidity in December can also create pronounced exaggerated moves,” said Alan Lau.

Rupee vs EM Currencies

The MSCI EM Currency Index is down more than 3% since end of September, as per Bloomberg News, poised for its biggest quarterly fall in two years.

Despite the rapid depreciation, the Rupee has registered a moderate decline compared to other emerging market currencies. For FY25 (till November 30), INR has stayed largely range-bound, exhibiting low volatility compared to G20 counterparts. Rupee saw a modest decline of 1.2 per cent since April 2024, performing better than the South Korean Won and Brazilian Real, which weakened by 2.2% and 12.7% against the dollar, respectively.

The Macro Picture

The Rupee has been making record lows, after the November trade deficit expanded more-than-expected to touch a record high of $37.8 billion. India's export growth has been impacted by a weakening of global demand, even as imports remain elevated.

The Finance Ministry in its latest monthly economic review has highlighted risks to global growth, adding that global trade in 2025 is increasing looking uncertain amid threats of higher tariff by the incoming administration of US President-elect Donald Trump.

The ongoing geopolitical tensions have increased risk aversion, leading to a flight to safety in currencies like the Dollar, thus adding to pressure on EM currencies. India’s foreign exchange reserves have risen by $6.4 billion during FY25 so far to a level of $652.9 billion as of December 13, 2024. The Finance Ministry said the reserves are sufficient to cover for more than 11
months of imports, and about 96 per cent of external debt outstanding as of June.

Rupee Fall - Market Impact

Rupee’s fall to record lows is seen as bullish for pharma companies, which earn a sizeable part of their revenue from exports.