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Indian Rupee Faces New Lifetime Low Against US Dollar

Sebencapital

Published
24/06/24
Indian Rupee Faces New Lifetime Low Against US Dollar| Seben Capital

The Indian rupee fell to a new lifetime low of 83.62 against the US dollar on Thursday. This drop is attributed to record block deals worth Rs 23,000 crore on Wednesday, including Vodafone Plc's stake sale in Indus Towers. The rupee had closed at 83.4550 in the previous session.

Federal Reserve Rate Cut Expectations and RBI Intervention

The Indian rupee's weakness is partly due to expectations of rate cuts by the US Federal Reserve. However, the Reserve Bank of India (RBI) has intervened to counterbalance this pressure. State-run banks were seen offering dollars near the 83.50 levels, likely on behalf of the RBI, to limit the rupee's decline amid potential outflows.

Market Reactions to Political Developments

The rupee's decline was exacerbated by the outcome of national elections, which showed a narrower-than-expected win for Prime Minister Narendra Modi's alliance. This result led to a selloff in local equities, further pressuring the rupee. Despite this, exit polls suggesting a Modi victory had previously boosted market sentiment, strengthening the rupee and government bonds.

Foreign Equity Outflows and Block Deals Impact

The significant block deals, including Vodafone's stake sale in Indus Towers, have intensified the pressure on the rupee. These deals contributed to a surge in foreign equity outflows, impacting the currency negatively.

Positioning and Market Flows

The rupee has been squeezed by broader weakness in Asia, but there is potential for it to be supported by positional flows. Market participants are watching for opportunities to capitalize on these movements.

REC's Foreign Borrowing Limit Increase

State-owned REC Ltd has approved raising its foreign currency borrowing limit to USD 24 billion from USD 20 billion while maintaining its overall borrowing limit in Indian rupees at Rs 6 lakh crore. This move could influence foreign investment flows and affect the rupee.

Windfall Tax Reduction on Petroleum Crude

India has cut the windfall tax on petroleum crude to 3,250 Indian rupees per metric ton from 5,200 rupees. This tax adjustment, revised every fortnight, was aimed at reducing the financial burden on the petroleum sector.

Rupee's Performance Amid Global and Local Factors

The rupee has shown resilience amid various factors, including importer dollar demand, equity outflows, and fluctuating oil prices. Despite these challenges, the rupee has experienced periods of appreciation, driven by positive sentiments in the domestic equity market and dollar inflows.

Citi and Goldman Sachs' Outlook on the Rupee

Citigroup Inc. remains optimistic about the Indian rupee's performance, citing strong economic fundamentals and expected inflows from India's inclusion in a global bond index. Similarly, Goldman Sachs predicts the rupee will appreciate to 81 against the US dollar over the next 12 months due to anticipated foreign capital inflows.

RBI's Role in Stabilizing the Rupee

The RBI has played a crucial role in stabilizing the rupee through regular interventions. These efforts have helped keep the rupee within a tight range, despite global economic pressures and domestic challenges.

India's Trade and Economic Agreements

India continues to strengthen its trade relationships through local currency settlement agreements. Recently, India and Nigeria agreed to a local currency settlement system, enhancing bilateral trade and investments. Additionally, India's Finance Minister praised the State Bank of India for enabling direct trade with Sri Lanka in Indian rupees.

Future Prospects for the Indian Rupee

Looking ahead, the Indian rupee is expected to remain stable, supported by RBI interventions and positive economic indicators. Analysts anticipate modest appreciation against the US dollar in the coming months, with potential for further strengthening based on global and domestic developments. A focus on improving trade balances and attracting foreign investments could further bolster the rupee's outlook.


Written by devesh gupta

I am Devesh Gupta, a Junior Analyst at Seben Capital, where I specialize in finance with a focus on market research and data analysis. I support investment decisions by translating complex financial data into actionable insights. My role at Seben Capital allows me to contribute significantly to our investment strategies, leveraging my analytical skills to drive success.

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