The Rupee weakened about 46 paise on Monday, the biggest single-day drop in a fortnight, weighed down by persistent FPI-related Dollar outflows from the Indian equity markets, uncertainty about the global impact of US tariffs on imports, and softness in the Chinese Yuan.
Demand for Dollars in view of forthcoming maturity of non-deliverable forward (NDF) positions also pressured the Indian currency.
Rupee weakens
The Rupee closed weaker at 87.33 per Dollar against previous close of 86.87. This came despite the Dollar itself weakening against currencies such as Japanese Yen and Swiss Franc due to fears of slowdown in the US economy amid trade war triggered by President Trump’s import tariffs against countries such as Canada, Mexico, and China.
India, too, could be at the receiving end of the US tariffs on imports from April 2. The bilateral trade talks on the tariffs are inconclusive.
Tariff troubles
“There are multiplicity of factors weighing down the Rupee. Our total exports have grown just 6 per cent in the first nine months of the current financial year, whereas imports have gone up 6.9 per cent during the same period. Trump’s tariffs are looming large on our exports to the US. Further, FPI-related Dollar outflows are happening from our equity markets. So, how do you expect the Rupee to be supported?” said Arvind Kanagasabai, Executive Vice President, Tamilnad Mercantile Bank.
He underscored that the external factors influencing the Rupee’s movement against the Dollar cannot be controlled by the central bank.
“RBI has to intervene on and off in the market to curb excessive volatility in the Rupee’s movement against the Dollar. Our forex reserves can cover 11 months of imports. But this is not a comfortable level. So, there will be cautious intervention in the forex market.
“In the process of defending the Rupee, which entails Dollar sales, the central bank is sucking out Rupee liquidity. This is creating a liquidity deficit in the banking system, which, in turn, is being addressed through liquidity infusion measures. But the current situation is beyond the control of any central bank. Volatility is adding to the demand for Dollars,” Kanagasabai.
Rahul Kalantri, Vice President (Commodities), Mehta Equities, obseved that the Rupee depreciated despite the dollar index and crude oil prices reaching four-month and 22-month lows, respectively.
“Investor uncertainty led to increased demand for the US Dollar as a safe-haven asset. Additionally, India’s ongoing negotiations for a bilateral trade agreement with the US also contributed to market volatility. Market participants are now closely monitoring consumer inflation data from both India and the US, set to be released on Wednesday, as this will influence expectations of rate cuts by the countries’ central banks,” he said.
Kalantri expects the rupee to remain volatile this week amid volatility in the dollar index and volatility in the global financial markets and the pair could trade in the range of 86.90-87.70.
