Indian Rupee hit a new low in November, in spite of weakness in the dollar.
Most experts say it’s weakening due to fundamental reasons, and the stress might remain.
Analysts say that rupee is seeing resistance at upper levels and might trade in the ₹83.2 to ₹83.38 in November.
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The Indian rupee has been on a seesaw since 2022, thanks to a multitude of factors. A big reason for the weakness in the INR has been the sharp appreciation in the US dollar. The dollar index has steadily risen since the Federal Reserve started hiking rates and capital flows reversed from riskier assets. So if the US dollar should depreciate, the local currency should gain, right? But this has not happened in the last few weeks. The US greenback weakened and almost all currencies – Euro, Pound and Yen appreciated against the dollar in November, except the INR and Turkish Lira.
On the contrary, the rupee hit a new low of ₹83.40 against the dollar on November 10, and has been volatile ever since. The reason, experts say, is pressure from importers.
“The rupee has been under pressure, more on the side of fundamentals. Exporters are holding back to make a gain expecting the rupee to come down while importers have asked their banks to buy dollars now for future payments. This has led to a mismatch in demand and supply, which has pushed down the rupee,” explain Madan Sabnavis, chief economist at Bank of Baroda.
In the month of October, India’s trade deficit widened to hit a record high of $31.46 billion. That’s a sharp rise from $19.37 billion in September, according to government data.
Another pressure point is the FPI sell-off that kicked off in September. Their net inflows have been robust at $12 billion in 2023. But since September, they’ve sold off stock to the tune of $5 billion as US bond markets became attractive.
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RBI’s men, horses and dollars
It’s customary for the Reserve Bank of India to weigh in, sell dollars and pull the rupee when it falls too low. It has done so thrice earlier in recent times. The first time was in October 2022 when the rupee fell below ₹83 for the first time. It helped prop it up again in December, and once more in February 2023 when it threatened the same levels.
“Finally, in August 2023, it once again fell below ₹83 and this time, all the RBI’s horses and all the RBI’s men were not able to generate sufficient upward momentum; since September 15, the rupee has struggled just below 83,” said Jamal Mecklai, CEO Mecklai Financial in his note on November 20.
Like Sabnavis, Mecklai too cites fundamental troubles that RBI is unable to protect it from. But if it wants to, it’s in a comfortable position to sell dollars again. On Friday, India’s central bank said that its forex reserves have increased by $5.077 billion to $595.397 billion during the week ending November 17.
Weakness to continueMost experts expect rupee to trade anywhere in the range of ₹83.2 to ₹83.38 to dollar for the rest of November. A breakout on either side of this range could provide further insight and guide future trading decisions, “We anticipate a slightly negative trajectory for the rupee, influenced by global market weaknesses and the prospect of a rebound in the US Dollar index. However, inflows from IPOs and a weak tone in crude oil prices might offer support to the domestic currency,” says Rahul Kalantri, VP of commodities at Mehta Equities.
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Future contracts too in rupee traded in a narrow range this week. Until more information on fundamental weakness comes in, the stress is widely expected to remain on the Indian currency.
“The pressure on the rupee is likely to remain and an ‘orderly’ decline, whatever that means, is on the cards,” Mecklai sums it up.
