The rupee has fallen more than 1 per cent over the past three trading sessions. However, market participants said India’s strong economic fundamentals, adequate foreign exchange reserves and the Reserve Bank of India’s (RBI’s) continued intervention could help prevent a sudden and sharp fall in the currency.
In the interbank foreign exchange market, the rupee opened at 95.70 against the dollar on Friday. It weakened further to 95.79 per dollar, down 27 paise from its previous close. On Thursday, the rupee had closed 44 paise lower at 95.52 per dollar.
Last week, the rupee had touched a two-month high of about 94.30 per dollar. However, it weakened to nearly 95.80 on Friday. Expensive crude oil, rising bond yields and continuing global tensions have largely offset the recent support provided by the RBI.
Traders said record foreign exchange reserves, RBI intervention in the market and strong domestic economic growth were supporting the rupee. However, rising global bond yields and crude oil trading above $108 per barrel were increasing pressure on India’s import bill.
Also Read
Rupee may fall to 96, says expert
Anindya Banerjee, head of commodity and currency research at Kotak Securities, said pressure on the rupee continued. Costly crude oil and foreign portfolio investor outflows had kept the rupee above the 95-per-dollar mark. It could move towards 96, he said, adding that 95 may now act as a support level.
Banerjee said record foreign exchange reserves, the RBI’s active presence in the market and strong domestic economic growth of 7.8 per cent were positive factors for the rupee. However, crude oil staying above $100 per barrel and rising global bond yields meant that India’s increasing import bill was currently the biggest pressure point for the currency.
Investors will track inflation data from the United States and India for further cues on the rupee’s movement, he said.
Ajay Kedia, director, Kedia Advisory, said the rupee had weakened about 1 per cent over the past three trading sessions. Brent crude moving close to $110 per barrel and a sharp increase in US bond yields had increased pressure on the rupee.
According to him, as long as Brent crude remains above $100 per barrel and the threat of food inflation persists due to El Nino, volatility and weakness in the rupee may continue.
However, the RBI’s record foreign exchange reserves could help prevent a sudden and sharp fall in the currency, he said. The 96-96.24 range will be important for the rupee against the dollar, while support is seen around 95.35. A sustained recovery in the rupee may be seen if crude oil prices fall, rainfall improves and global tensions ease.
Kedia said the RBI was in a stronger position this time to deal with currency volatility. India’s foreign exchange reserves had reached a record $740.80 billion by August 28. Reserves had increased by about $75 billion over the previous nine weeks.
Special schemes launched in June to boost overseas borrowings and deposits brought in more than $136 billion. Of this, about $127 billion came through non-resident Indian deposits. This has strengthened the RBI’s ability to intervene in the market to prevent any sudden large fall in the rupee, he said.
Inflation becomes a key concern
Kedia said inflation was emerging as the second major risk for the rupee. A strengthening El Nino had led to significant volatility in the monsoon. Rainfall in June was 35 per cent below normal. If September rainfall also remains below normal, production of cotton, soybean, maize and pulses may be affected.
Lower soil moisture could also hurt the sowing of wheat and mustard. Food inflation had already increased to 5.52 per cent in July.
Kedia said inflationary pressure was not limited to India. The Food and Agriculture Organization food price index rose to 133.3 in August, the highest level since November 2022. Poor weather and rising global tensions had affected prices of cereals, edible oils and sugar. Disruptions in the Black Sea region, linked to Russia and Ukraine, had also affected grain supply.
At the same time, rising tensions in West Asia were increasing energy and fertiliser costs. With crude oil near $110 per barrel, there is a risk of simultaneous inflation in food and fuel. Such a situation may make the RBI’s rate decision more difficult and keep pressure on the rupee.
Which sectors may face pressure, and who may benefit?
Pranay Agarwal, director and chief executive officer, Stoxkart, said the recent weakness in the rupee against the US dollar was an important signal for Indian markets. A weaker rupee can make imports costlier, increasing the risk of inflation and affecting companies whose costs are denominated in dollars.
The biggest concern is crude oil, he said. If oil prices remain high and the rupee stays weak, India’s current account may come under pressure. This could also affect bond yields.
Import-dependent sectors such as aviation, oil marketing and chemicals may remain under pressure. On the other hand, information technology, pharmaceuticals and some manufacturing companies may benefit from a weaker rupee because a large part of their earnings comes from overseas markets.
Agarwal said the rupee could remain range-bound in the near to medium term, though the risk of weakness remained. Its movement will depend on crude oil prices, foreign investor flows, the movement of the US dollar and domestic economic growth.
However, India’s strong economic position, healthy foreign exchange reserves and continued intervention by the RBI could help prevent a sudden and sharp fall in the rupee, he said.
