However, dealers said the Reserve Bank of India (RBI) seems comfortable with a weaker rupee to support export competitiveness, especially in the context of the ongoing trade deal with the US.“This is more of a devaluation than a depreciation,” said a trader at a public sector bank.
The Indian currency rose from 89/$1 to 90/$1 in just eight trading days, and traders expect the rupee to cross the 91/$1 mark in the coming month. This sharp decline has pushed up hedging costs, with the one-month dollar/rupee non-deliverable forward premium now at a seven-month high of 23.25 paisa on Wednesday, LSEG data showed.
“The RBI appears to be taking advantage of lower domestic inflation and supporting the rupee amid an ongoing trade deal, with the currency being the arsenal,” said Anindya Banerjee, head of commodities and currencies at Kotak Securities.
India’s current account deficit narrowed by about 90 basis points on an annual basis to 1.3% of gross domestic product in the second quarter, but the goods trade gap in October was the widest ever at $41.7 billion.
Relative laggard
The rupee has fallen 5.3% this year, putting it on track for its steepest annual decline since 2022 and making it the worst-performing Asian currency. Although the RBI intervened occasionally to control the pace of depreciation, the extent of its intervention seemed relatively limited.
“By mid-fall, importers will hedge their positions and payments for the next quarter or so, while exporters wait for the currency to stabilize before taking any positions,” said Sajal Gupta, head of forex and commodities at Nuvama.
Gupta expects the currency to cross the 91 mark next month. The fall of the rupee from 85 to 90 took just under a year, or less than half the time it took to fall from 80 to 85.
India’s real effective exchange rate, or REER, against a basket of major world currencies and rival currencies has already fallen below 98, and the current pace of declines should further depress the REER. A reading below 100 indicates the rupee is undervalued, demonstrating India’s export competitiveness in a challenging year for global trade.
In terms of portfolio outflows, India is one of the worst-hit markets in the world, with net sales of shares by foreign investors worth nearly $17 billion so far this year. Net foreign direct investment (FDI) also turned negative for the second month in a row in September, the RBI’s November bulletin showed.
It’s fair to say that foreign investors have been big buyers in India’s red-hot primary market, buying a net $7.6 billion worth of initial public offerings (IPOs) so far this calendar year. But the exit from the secondary market – by more than $24 billion in the calendar year – has far exceeded their collective involvement in the primary market.
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