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Indian Rupee faces slow grind lower on oil and China rotation risks

Submitted by admin on October 25th, 2024

The Indian rupee, which had reached an all-time low of 84 to the dollar this month, continued on a downward trajectory as geopolitical risks drove up oil prices and money flowed out of local stocks amid a shift toward China.

Record gold prices, a strengthening dollar, and increased risk aversion would be the strongest arguments why the central bank will let the rupee slide,” Barclays Plc. said. The lender sees the currency moving to 84.40 per dollar gradually, while researcher QuantEco Research is targeting 84.50, and Kotak Mahindra Bank Ltd. is expecting it to drop to 84.25.

The global headwinds from the geopolitical risks and at a slower pace of monetary easing in the US amid robust data are expected to weigh on the rupee in near-term, said Upasna Bhardwaj, chief economist with Kotak in Mumbai. Foreign portfolio outflows from India and other EMs are reflective of this uncertainty as funds moved towards China on hopes of its recovery, she said.

Global funds have pulled out $9.1 billion from Indian equities this month as valuations remain high and they continue shifting their attention towards China. Even India’s index-eligible bonds, which have been attracting approximately $2 billion monthly since June when they were added to the global bond indexes, witnessed two consecutive weeks of outflows this month.

The rupee declined to a record low of about 84.10 to a dollar earlier in October and closed at 84.07 on Monday. According to strategists from Barclays led by Lemon Zhang, the Reserve Bank of India allowed the rupee to fall past 84 on account of a sharp rally in the currency’s nominal effective exchange rate since end-September.

Traders say the central bank has defended the 84 level for two months, armed with almost $700 billion in foreign reserves. The authority’s tight grip over the currency has kept speculators at bay, making a sharp depreciation unlikely and turning the rupee into one of most stable among emerging markets.

This has resulted in the rupee performing relatively better compared to Asian counterparts when the dollar was gaining currency, but lagging behind during the periods of dollar weakness.
“We’re not managing the exchange rate — the rupee is depreciating vis-a-vis the dollar and we buy dollars whenever there is an opportunity, said Governor Shaktikanta Das at a Bloomberg event on Friday.

Elara Securities suggests pressure on the rupee would be contributed to by higher US yields ahead of the US elections next month and a possible slowdown in debt flows.

“We see the rupee gradually moving into a zone where the risks are becoming more prominent vs one-two quarters ago,” Elara economist Garima Kapoor wrote in a note. The firm has reduced its rupee forecast to 83.5 from 82.8 previously for fiscal 2025, with risks on the downside.