RBI battles relentless rupee slide: Can fresh investments stem the tide?

The rupee free fall
Despite RBI intervention, the rupee remains vulnerable due to a potential shift in US monetary policy and global economic slowdown.

The rupee touched record lows against the dollar on Tuesday, reaching 83.57 per dollar. The currency recovered slightly as banks sold dollars in the offshore non-deliverable forwards market. On Wednesday, the domestic currency closed at Rs 83.54, a modest gain of 3 paise from the previous day.

The rise of the dollar has negatively impacted the rupee and other regional currencies. Market nervousness about the outcome of the ongoing US Federal Open Market Committee meeting adds to these troubles. The domestic currency last touched a record low of 83.54 on April 18. 

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Further decline likely for rupee

The upcoming US Consumer Price Index (CPI) data is crucial for market movements, and participants are closely watching it. The Federal Reserve’s upcoming policy statement is also under scrutiny, as it provides insights into the US economy’s future health. These announcements can significantly impact the dollar value, thereby affecting the Indian rupee.

The rupee’s stability is precarious, influenced by RBI interventions and importer demand. Technical indicators suggest that a move towards 83.80 INR/USD is likely if the currency breaches 83.60. Investors should watch for significant shifts in demand and RBI actions, which could lead to volatility. Additionally, the dollar index dipped slightly to 105.2, and other Asian currencies remained range-bound as investors await key US inflation data and the Federal Reserve’s policy decision.

The domestic currency may weaken further due to a strong dollar and high oil prices. However, positive global market trends and fresh foreign investments could help stabilise the currency at lower levels. Forecasts indicate that the rupee might open between 83.58 and 83.60 to the dollar, surpassing the previous all-time low of 83.5750.

In 2023, the rupee traded within a narrow range of 80.88 to 83.45, maintaining relative stability despite factors such as US interest rate hikes, rising US Treasury yields, geopolitical tensions, and banking crises. This stability was largely due to timely interventions by the RBI in both buying and selling activities.

Economic projections and market sentiment

For 2024, the US Federal Reserve was expected to announce a 75-basis points (bps) rate cut, with the median fund rate projected to be at 4.6%, down from 5.4% in 2023. Three rate cuts of 25-bps each were anticipated. However, with inflation remaining stubbornly high, the Fed is expected to keep rates steady. Many economists still predict rate cuts later in 2024, though not at the June 12 meeting.

The consumer inflation is projected to have slightly increased to 4.89% in May from 4.83% in April, according to a Reuters poll. This marginal rise in inflation, coupled with the rupee’s pressured stability, presents challenges for the Indian economy. Additionally, foreign investor behaviour has been mixed, with net purchases of Indian shares amounting to $343.5 million on June 10, while net sales of Indian bonds stood at $17.7 million. These dynamics highlight the ongoing tug-of-war between domestic economic pressures and foreign investment flows, which are pivotal in shaping the rupee’s future performance.

If rate cuts occur due to cooling inflation, the dollar may weaken, benefiting the rupee. However, rate cuts resulting from unexpected events could destabilise the market. Historically, rate peaks have often been followed by US recessions. If a recession or crisis prompts rate cuts, the market could become risk-averse, further weakening the rupee.

Geopolitical escalations could also impact the rupee. Higher crude oil prices, resulting from geopolitical developments, could worsen India’s trade deficit. For the fiscal year 2023-24, India’s trade deficit was $78.12 billion, a 35.77% decrease from the previous year. The merchandise trade deficit was $240.17 billion, a 9.33% decrease. Another negative global event could increase oil prices, widening the trade deficit and negatively affecting the rupee.

Foreign investments and economic outlook

India’s inclusion in JP Morgan’s global bond market index is seen as a positive for the rupee, potentially attracting more foreign investments. However, if these inflows do not materialise, the rupee might come under pressure in the latter half of the year. A global economic slowdown could also limit the rupee’s strength. For 2024, the rupee is likely to remain in a range of 82-83.50 (narrow) or 81.50-86 (broad).

While the rupee faces significant challenges from a strong US dollar, high oil prices, and global economic uncertainties, timely interventions by the RBI and positive foreign investment flows could provide some stability. Investors should closely monitor US economic indicators, Federal Reserve policies, and geopolitical developments to navigate this volatile environment.