The local unit, which hit fresh lows on 8 straight trading days, retreated on domestic factors amid what some analysts described as its estimated ‘overvaluation’ relative to competing currencies.
“The steep fall was not driven by global triggers but rather by domestic factors,” said VRC Reddy, head of treasury at Karur Vysya Bank. “As it was the settlement day for currency futures and the non-deliverable forwards (NDF) markets, the rollover of positions led to significant dollar buying, particularly during the USD-INR fixing window.”
Furthermore, customary month-end demand from importers settling bills in foreign currency caused the rupee to retreat more.
‘Month-end Dollar Demand’
“This pressure was further amplified by heightened month-end dollar demand, stop-loss triggers in trader positions, and initially limited intervention by the regulator,” Reddy said.
At first glance, allowing such a precipitous fall in the rupee seems contrary to the Reserve Bank of India‘s (RBI) usual stand on exchange-rate stability. The regulator has often maintained it does not target any level or band for the rupee, but intervenes in the forex market to ensure an orderly movement of the exchange rate and overall stability, curb undue volatility, and anchor market expectations.
Friday appeared to be an exception, however.
Limited RBI Intervention
“The RBI did not intervene in the morning, and later we saw intervention when the rupee touched 85.80 levels,” said Dilip Parmar, currency analyst, HDFC Securities.
The rupee fell 5 paise every 30 minutes since morning, a bank dealer said. The unexpectedly sharp fall saw several importers rushing to buy dollars to cover their positions, resulting in further dollar demand, said the dealer.
The rupee opened at 85.31, saw an intraday fall of 50 paise to touch 85.80 and closed 0.3% down over the previous trading day’s close of 85.26, LSEG data showed. This was the steepest single-day fall in terms of closing levels since June 4, when general election results surprised the markets.
Dealers said the RBI intervened less aggressively Friday, partly because the Indian currency is overvalued by 8% compared with a basket of the 40-currency real effective exchange rate (REER), indicating the rupee’s relative under-competitiveness against its peers. REER of the rupee rose to 108.14 in November from 107.20 in October, up 0.9%, showed RBI’s November bulletin.
The Dollar index, which reflects the strength of the dollar versus other major currencies, is at its peak at 108.
“The rupee witnessed its sharpest decline in six months today (Friday), ending as the worst performer among its Asian peers. Today’s currency movement suggests a potential shift in the RBI’s intervention strategy. If this approach persists, the rupee could comfortably breach the 86-mark in the next quarter,” Reddy said.
Relative Overvaluation
According to Kunal Sodhani, foreign exchange treasury executive at Shinhan Bank India, Asian currencies have weakened beyond 2.5% since November, while the rupee has weakened by 1.39%.
“Hence, there remains scope for further weakness to maintain export competitiveness. I expect the RBI intervention policy to be shallow and they (RBI) may have to allow further rupee depreciation,” Sodhani said.
The RBI has sold $60 billion between the end of September and December 20, which is reflected in the movement of the central bank’s foreign exchange stockpile contained in the weekly statistical supplement published Friday.
Traders said that three major factors will affect the local currency: Geopolitical developments coinciding with US President-elect Donald Trump taking charge in January, the upcoming union budget, and the measures taken by the monetary policy committee in February.
The rupee must depreciate if the RBI wants to maintain its competitiveness. Plus, in REER terms, the Indian currency is overvalued,” Parmar said. “I think 2025 will be a year of volatility due to uncertainties from Trump’s administration.
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