Indian Rupee Weakens Amid Expectation of Rate Cuts
The Indian rupee is anticipated to depreciate further against the US dollar, reaching a new low on Monday. Traders speculate about interest rate reductions due to signs that the central bank is relaxing its control over the currency under its new leadership.
A Bloomberg poll of economists predicts that the Reserve Bank of India (RBI) will lower the repurchase rate by 25 basis points on Friday, marking the first easing since the pandemic. This move will intensify pressure on the currency following the impact of US tariffs on Asian markets.
According to Australia and New Zealand Banking Group Ltd., the rupee could decline to 88.70 per dollar by year-end, while Emkay Global Financial Services Ltd. foresees a drop to 89.50 by December. Markets fell by as much as 0.8% to 87.29 after reopening post-budget on Saturday.
"In recent months, there has been a shift in RBI's currency management with an accelerated pace of rupee depreciation," noted Gaura Sen Gupta, chief economist at IDFC FIRST Bank Ltd. "We predict sustained depreciation pressure due to the rupee's overvaluation and subdued capital inflows."
The rupee became Asia's second-worst performing currency this year after outperforming most peers in the previous quarter. It has depreciated by almost 3% since Sanjay Malhotra's appointment as governor in December, signaling his willingness to allow the local currency to fluctuate more freely with regional counterparts.
Former governor Shaktikanta Das's interventions in the foreign exchange market made the rupee one of the world's most stable currencies. The RBI systematically accumulated reserves exceeding $700 billion and employed them to mitigate volatility.
In November, the Indian unit's real-effective exchange rate (REER), a measure of its competitiveness versus peers, reached a record high of 108.13 before declining somewhat last month. Although it remains overvalued, the shift in RBI policy and foreign fund outflows are pushing it towards further depreciation.
In January, overseas investors sold more than $8 billion from Indian stocks due to concerns over economic slowdown and weak corporate profits. Global uncertainty is also a factor as investors reduce exposure to emerging markets.
Following US President Donald Trump's imposition of tariffs on imports from Canada, Mexico, and China, the dollar surged while other currencies fell, indicating the start of a new era of global trade conflict. Indian officials downplayed the effect of this action on the rupee, stating that the central bank would continue to manage volatility.
V Anantha Nageswaran, the finance ministry's chief economic adviser, stated in an interview on Bloomberg TV that the rupee's depreciation to a record low corresponds with other markets and that it "continues to outperform others due to strong domestic fundamentals."
As analysts forecast further rate cuts to stimulate economic growth, the pressure on the currency may persist. The fiscal deficit target reduction announced in Saturday's budget gives the central bank more leeway to adopt a dovish stance. Bonds have rallied, with swaps pricing in a quarter-point cut this week followed by a similar action in April.
Dhiraj Nim, a forex strategist at ANZ, believes that any further dovish signals could cause a moderate depreciation of the rupee. "It would be acceptable to allow this, particularly if the source is the strength of the dollar."