After India delivered a blow-out GDP expansion of 8.2 percent in the September quarter, expectations were high that the rupee might gain ground. Instead, the Indian rupee slid to a fresh record low — dipping to ₹ 89.7575 per US dollar — as weak trade and portfolio flows and the absence of a US-India trade deal overshadowed the growth surprise.
On Monday, the rupee depreciated by 34 paise to an all-time low of 89.79 (provisional) against the US dollar in intraday trade.
Despite rallying domestic equities, the rupee ranks among Asia’s worst-performing currencies this year. According to traders, the losses would have been even steeper if not for periodic intervention by the Reserve Bank of India (RBI), which stepped in to offer dollars at intervals.
Bankers point out that the economy’s robust growth offered little comfort to the currency. The rupee remains under pressure from lack of progress on a US trade deal, heavy importer demand for dollars, dipping capital flows and a less supportive balance-of-payments position.
Further headwinds came from the unwinding of positions in the non-deliverable-forwards market and non-resident purchase behaviour — factors which, along with state-run banks’ intermittent dollar sales, weighed heavily on the rupee. Some economists now suggest that a "calibrated" depreciation may be inevitable, and perhaps even beneficial, under current macro-conditions.
Traders said the rupee also came under pressure as positions in the non-deliverable forwards market matured, prompting fresh dollar demand. State-run banks were intermittently seen offering dollars, a sign of possible central bank intervention to smooth volatility.
Economists at JP Morgan said in a note that a “calibrated” depreciation of the rupee appears “both inevitable and desirable” in the current macro environment. They added that the longer the US-India trade deal remains stalled, the more the exchange rate will have to adjust to compensate.
Recent statements from US and Indian officials had raised hopes that the steep 50 percent tariffs on Indian exports might soon be eased, but no agreement has been reached. The tariffs have weighed heavily on trade and portfolio inflows, leaving the rupee increasingly dependent on central bank support.
Foreign investors have withdrawn more than $16 billion from Indian equities so far this year, while India’s merchandise trade deficit hit a record high in October.
The currency’s prolonged weakness has pushed its 40-currency real effective exchange rate into undervaluation territory. The index fell to 97.47 at the end of October, central bank data show, with any reading below 100 indicating an undervalued currency relative to trading partners.
In a separate assessment, the International Monetary Fund last month reclassified India’s foreign exchange regime as a “crawl-like arrangement”. The IMF noted that although the rupee has shown greater two-way movement this year, there is still scope for additional exchange-rate flexibility.