The Indian rupee, once among the strongest performers in emerging Asia, has recently experienced significant declines, placing it among the weaker currencies this quarter. This downturn is expected to persist due to ongoing market dynamics. The rupee has tested new lows recently, influenced by increased outflows from local equities following an equity tax hike and heightened demand for dollars from importers. A potential dovish stance in the Reserve Bank of India’s (RBI) policy meeting on August 8 could further pressure the currency.
Barclays Plc forecasts the rupee will weaken to 83.85 against the dollar in the short term, while Morgan Stanley projects it will fall below 85.2 within the next year. As of Friday, the rupee was trading at 83.75, reflecting a 1.3 percent decline from its 2024 peak in March. The rupee’s underperformance compared to other Asian currencies is attributed to foreign investors becoming net sellers of Indian stocks amid a risk-off environment, according to Dilip Parmar, a currency analyst at HDFC Securities. In the near term, the rupee is expected to approach 84, with the RBI likely to intervene aggressively at this level. Parmar anticipates a gradual decline in the rupee, driven by potential shifts in monetary policy and ongoing management by the central bank.
The RBI is expected to maintain its current interest rates this week. However, any movement toward a more neutral monetary policy could exert additional downward pressure on the rupee. The central bank’s approach is likely to involve a managed depreciation to mitigate excessive volatility. Min Dai, a strategist at Morgan Stanley, suggests that the RBI will allow more flexibility for the USD/INR pair. According to Dai, a trading range above 83.70 could be an indicator of this policy shift.
Despite its recent challenges, the rupee has maintained relatively low volatility compared to global peers. It has remained resilient against the backdrop of a robust dollar, trading within a narrow range while other currencies have fluctuated in response to Federal Reserve rate cut expectations. The rupee’s stability has made it an attractive option for carry traders capitalizing on interest-rate differentials. However, the recent strengthening of the Japanese yen, a key currency in carry trades, has disrupted these positions.
Analysts at Barclays, including Shreya Sodhani and Mitul Kotecha, have noted that the rupee’s recent performance reflects a broader unwind of carry trades. Looking ahead, they anticipate a gradual depreciation of the rupee in the medium term.
