Rupee Set to Extend Slump to New Record on India Rate-Cut Bets

The Indian rupee is on track to extend its slump to a new record low, as investors bet on further interest rate cuts by the Reserve Bank of India (RBI). The currency has been under pressure in recent months, driven by a combination of domestic and external factors. As of Monday, January 13, the rupee hit an all-time low of 86.31 against the US dollar, marking a significant decline from its previous record low of 85.45 in September 2023.



Key factors driving the rupee's depreciation include:

1. Strengthening US dollar: The dollar index has climbed to its highest level in over two years, fueled by better-than-expected job growth in the US and a proactive Federal Reserve. This has led to a decrease in the value of the Indian rupee.
2. Surge in crude oil prices: Brent crude rose 1.44% to $80.91 per barrel, increasing India’s import costs and adding pressure on the rupee.
3. Foreign fund outflows: Foreign institutional investors (FIIs) have been consistent sellers in Indian markets, with a net sale of ₹2,254.68 crore worth of equities on Friday, January 10.
4. Weak domestic market sentiment: Domestic equity markets have mirrored global weakness, with the BSE Sensex dropping by 550.49 points to 76,828.42 and the Nifty sliding 182.45 points to 23,249.05 during early trade.
5. Declining forex reserves: India’s forex reserves fell by $5.693 billion to $634.585 billion in the week ending January 3, further weakening the rupee’s resilience against external pressures.

The RBI has limited room to intervene, having already utilised a significant portion of its reserves. As of last week, India’s forex reserves stood at $634.6 billion, a decline of $70 billion from the September peak. Forex traders warn of continued volatility, especially with the US dollar expected to remain strong.

The anticipated rate cuts by the RBI are expected to have both short-term and long-term impacts on the Indian rupee's exchange rate against the US dollar. In the short term, increased capital inflows and reduced demand for the rupee may lead to further depreciation. However, in the long term, lower interest rates can help control inflation and stimulate economic growth, potentially strengthening the rupee's exchange rate against the dollar.

As the rupee hits an all-time low, import costs soar, and exports face structural hurdles, calling for a strategic overhaul of India’s exchange rate policy. The RBI and the government must work together to address the underlying factors driving the rupee's depreciation and implement policies that promote currency stability and economic growth.