"Rupee Battles Weak Risk, Failure at Psychological Level"

The Indian rupee has been on a rollercoaster ride in recent months, battling weak risk sentiment and failing to hold key psychological levels. The currency has depreciated against the US dollar, hovering near a three-month low as global trade tensions and economic uncertainties weigh heavily on emerging markets. Let's dive into the factors driving this volatility and what it means for investors.



The Global Context

The US dollar has been on a tear, buoyed by strong economic data and the Federal Reserve's hawkish stance on interest rates. The dollar index, which measures the greenback against a basket of major currencies, has surged to its highest level in months. This strength has put pressure on emerging-market currencies, including the rupee.

The latest round of US tariffs and countermeasures from Canada and China have stoked fears of an escalating trade war. China’s yuan has been firm in offshore trading, but the rupee has not been so lucky. The rupee settled at 279.87 against the US dollar, a loss of Re0.10, as the greenback's resurgence took a toll on emerging-market currencies.

Domestic Factors

Domestically, the rupee's woes are compounded by a widening trade deficit and capital outflows. India's trade deficit widened in 2024 due to costly oil and other commodity imports, which put downward pressure on the rupee. The Reserve Bank of India (RBI) has been actively intervening in the non-deliverable forward (NDF) markets to stabilize the rupee, but these interventions have their limits.

The RBI's actions in the NDF markets help to manage the rupee's volatility by influencing the forward exchange rates, which in turn can affect the spot exchange rates. By intervening in the NDF markets, the RBI can mitigate the impact of speculative trading and sudden capital outflows, thereby providing a buffer against extreme fluctuations in the rupee's value.

Psychological Levels

The rupee's failure to hold key psychological levels, such as 275 against the US dollar, has added to the sense of unease among investors. Psychological levels are important because they often act as support or resistance levels, influencing market sentiment and trading behavior.

The rupee's depreciation has been less severe against some currencies, such as the euro and the Japanese yen. For example, the rupee appreciated by over 5% against the euro from August 27 to December 27, 2024. This is partly due to the euro's own weakness against the US dollar, as well as India's trade surplus with some of its major trading partners, which can lead to increased demand for the rupee.

What Lies Ahead?

Looking ahead, the outlook for the rupee is mixed. On the one hand, the RBI's interventions and India's strong economic fundamentals could provide a buffer against further depreciation. On the other hand, global trade tensions and the strength of the US dollar could continue to weigh on the rupee.

Analysts project a relatively stable outlook for the rupee in 2025, expecting it to trade between ₹82 and ₹87 against the dollar. "A potential recovery could be supported by government policy measures and improvements in domestic economic growth," said Ajit Mishra, Senior Vice President of Research at Religare Broking Ltd.

In conclusion, the rupee's battle against weak risk sentiment and its failure to hold key psychological levels reflect the broader challenges facing emerging-market currencies. While the RBI's interventions and India's economic fundamentals provide some support, global trade tensions and the strength of the US dollar remain significant headwinds. Investors should stay vigilant and be prepared for continued volatility in the months ahead.