On Friday, the Indian rupee dropped to a new low of 90.5175 against the US dollar, breaking its earlier all-time low of 90.4675 set on 11 December. Continued uncertainty in talks on India-US trade, which still has not been settled even after several rounds of discussions, also prompted the currency markets.
Participants in the market observed that it has taken too long to reach a trade agreement, which has led to low investor confidence. Global investor confidence remains high, with many likely to rebalance their portfolios out of emerging markets until the trade picture is clearer. This has put pressure on demand for the US dollar and weakened the rupee's support.
In recent sessions, foreign institutional investors have continued to de-expose themselves to Indian equities and debt instruments. Analysts also highlighted that the broader strength of the US dollar index has contributed to depreciation pressure on the rupee, driving the currency to new lows.
The weakness of the rupee is also due to potential portfolio outflows as global funds consider the risks associated with emerging-market currencies. As the US Federal Reserve maintains a higher interest rate environment and US economic indicators remain strong, investors continue to prefer dollar-based assets.
Currency traders claimed that importers, particularly oil companies, had increased dollar demand, thus putting short-term strain on the rupee. The trade deficit in India has also increased due to high crude prices, further impacting currency stability.
The dealers say that the Reserve Bank of India (RBI) has not been an extreme interventionist in the foreign exchange markets. Although the central bank can intervene to calm excessive volatility, it has, to date, left the rupee to respond to international market forces.
In the short term, the rupee's direction is expected to be determined by developments in trade negotiations between India and the US and by global risk sentiment. According to market analysts, a breakthrough in talks would stabilize the currency and trigger inflows.
But until there is a clear picture, the rupee could continue to suffer from a series of externalities, such as rising US yields, persistent dollar strength, and the fear of the dynamics of the Indian current account.