- The Indian rupee has hit a record low of 84.88 against the U.S. dollar due to pressures from the non-deliverable forwards market and importers.
- The Reserve Bank of India (RBI) has intervened, with state-run banks offering dollars, likely on behalf of the RBI, to prevent further depreciation.
- Factors such as a potential weaker yuan and strong dollar buying by local importers have contributed to the rupee's decline.
- The RBI's actions in response to this crisis, reminiscent of a similar situation in 2013, will be crucial in determining the rupee's future trajectory.
The Indian rupee, in an unprecedented turn of events, has plummeted to an all-time low. The pressures of dollar bids in the non-deliverable forwards (NDF) market and from importers have led to this decline. The rupee's value against the U.S. dollar dipped to a record low of 84.88, marking a 0.04% decrease on the day. As of 10:00 a.m. IST, the currency was quoted at 84.8750.
The Reserve Bank of India (RBI) has been observed to intervene in an attempt to curb the rupee's losses. State-run banks were reportedly offering dollars, most likely acting on behalf of the RBI. This intervention by the central bank has been instrumental in preventing further depreciation of the rupee.
The rupee's decline can be attributed to several factors. One of the primary reasons is the heightened demand for the dollar in the NDF market. This, coupled with strong dollar buying by local importers, including oil companies, has exerted significant pressure on the rupee.
Factors Weighing on the Rupee
The currency's value has been adversely affected in recent sessions due to these factors. The prospect of a weaker yuan also poses a significant challenge to Asian currencies. This comes in the wake of reports that China is contemplating allowing a weaker yuan to mitigate the tariff risks under the incoming Donald Trump administration. This development could potentially exacerbate the rupee's current predicament.
On the day of the rupee's record low, Asian currencies exhibited mixed performance. The offshore Chinese yuan, for instance, rose by 0.1% to 7.26, recovering from a low of 7.29 in the previous session. The dollar index remained steady at 106.5 following U.S. inflation data that led investors to almost fully price in a December rate cut by the Federal Reserve.
Despite heightened expectations, the dollar's stride remained unblunted. ING Bank, in a note, stated, We look for another 25bp Fed cut next week, but new Fed forecasts should show a shallower series of cuts in 2025. A shallower easing cycle by the Fed is likely to bolster the dollar, which could potentially put further pressure on the rupee.
Implications and Historical Precedents
In light of the anticipated U.S. rate cut, dollar-rupee forward premiums have risen. The 1-year implied yield increased by 7 basis points to 2.22%, marking its highest in December so far. This is not the first time that the Indian rupee has faced such a crisis. In 2013, the rupee had plunged to a record low against the dollar due to a combination of a large current account deficit and sluggish growth.
The RBI had to intervene then as well, taking measures such as tightening liquidity and curbing gold imports to stabilize the currency. The current situation calls for strategic intervention and effective monetary policy measures by the RBI to prevent further depreciation of the rupee.
The central bank's actions will be crucial in determining the future trajectory of the rupee in the face of global economic uncertainties and domestic pressures. The rupee's current predicament underscores the complex interplay of domestic and international economic factors. As the RBI steps in to curb losses, the world watches closely to see how the situation unfolds.
