Rupee Bounces Back After Record Low of 85.81: RBI Support and Market Implications. The Indian Rupee’s ongoing volatility against the US dollar continues to capture attention, as it partially recovered after hitting a historic low of 85.81 on December 27. The currency settled at 85.53, marking its ninth consecutive day of decline and its steepest single-day drop since June 4. Strong month-end demand for the dollar in the non-deliverable forwards (NDF) market weighed heavily on the Rupee, but timely intervention by the Reserve Bank of India (RBI) helped it regain some ground.
Rupee’s Performance in 2024: A Tough Year
So far in 2024, the Rupee has weakened by 3% against the US dollar, heading for its seventh straight year of annual losses. December has been particularly challenging, as the currency braces for its worst monthly performance in two years. On a weekly basis, the Rupee fell nearly 0.3%, marking its eighth consecutive week of decline.
This prolonged fall has seen the Rupee breach the psychologically significant 85.50 mark for the first time. Market experts attribute this sharp decline to heightened dollar demand, influenced by the expiry of December currency futures contracts and increased activity from importers at the month’s close.
RBI Intervention and Policy Under New Leadership
The RBI’s late-day intervention played a critical role in stabilizing the Rupee’s freefall. However, the central bank has not officially announced any changes to its forex market intervention strategy under the new governor, Sanjay Malhotra. While market participants speculate on potential shifts in policy, the RBI’s actions underscore its commitment to maintaining stability in the forex market.
External Factors Impacting the Rupee
The Rupee’s depreciation is part of a broader trend affecting emerging market (EM) currencies. Ongoing geopolitical tensions and global economic uncertainties have heightened risk aversion, driving investors toward safer assets like the US dollar. This “flight to safety” has compounded pressures on the Rupee.
Despite these challenges, India’s foreign exchange reserves provide a significant buffer. As of December 13, 2024, the reserves stood at $652.9 billion, reflecting an increase of $6.4 billion during FY25. The Finance Ministry emphasized that these reserves are sufficient to cover over 11 months of imports and approximately 96% of the country’s external debt as of June.
Implications of the Rupee’s Decline
The Rupee’s fall to record lows has far-reaching implications for various sectors. While the depreciation increases import costs, it also benefits export-driven industries. Pharma companies, in particular, stand to gain as a significant portion of their revenue comes from exports. A weaker Rupee enhances their global competitiveness and boosts profitability.
Conversely, the depreciation poses challenges for import-dependent sectors, such as energy and electronics, as it raises the cost of raw materials and finished goods. This could contribute to inflationary pressures in the domestic market.
Looking Ahead
As the Rupee continues to face headwinds, the RBI’s role in managing volatility will remain critical. Market participants will closely watch for any signs of policy adjustments under Governor Sanjay Malhotra. Meanwhile, geopolitical developments and global economic trends will likely influence the Rupee’s trajectory in the coming months.
In conclusion, while the Rupee’s recovery from its historic low is a positive sign, challenges remain. The interplay between domestic policies and external factors will shape the currency’s performance, impacting both the broader economy and specific industries.
