New Delhi: The rupee experienced its steepest intraday decline since March 2023 on Friday, December 27, falling to an all-time low of 85.80 against the US dollar before recovering slightly to close at 85.53. This marked its lowest closing level ever and the eighth consecutive trading day of fresh lows, according to a report in the Economic Times.
Market analysts attributed the decline to domestic factors, including currency futures settlement and month-end demand for dollars from importers.
Domestic factors drive decline
“The steep fall was not driven by global triggers but rather by domestic factors,” VRC Reddy, head of treasury at Karur Vysya Bank, told the Economic Times. “As it was the settlement day for currency futures and the non-deliverable forwards markets, the rollover of positions led to significant dollar buying, particularly during the USD-INR fixing window.”
Additionally, customary month-end demand from importers settling bills in foreign currency amplified the pressure on the rupee. “This pressure was further amplified by heightened month-end dollar demand, stop-loss triggers in trader positions and initially limited intervention by the regulator,” Reddy added.
RBI intervention limited
Despite the RBI’s usual focus on exchange-rate stability, its intervention on Friday appeared subdued. “The RBI did not intervene in the morning and later we saw intervention when the rupee touched 85.80 levels,” Dilip Parmar, currency analyst at HDFC Securities, told the Economic Times.
Dealers noted the rupee depreciated steadily, losing 5 paise every 30 minutes in early trade. The currency opened at 85.31, hit an intraday low of 85.80, and eventually settled 0.3% lower than Thursday’s close of 85.26.
Also read: India’s Trade Deficit Swells to Record $37.8 Billion in November
Overvaluation concerns
Market analysts are of the view that the rupee remains overvalued by approximately 8% against a basket of 40 currencies based on the real effective exchange rate (REER). RBI data for November showed the rupee’s REER had risen to 108.14, up from 107.20 in October.
“Hence, there remains scope for further weakness to maintain export competitiveness. I expect the RBI intervention policy to be shallow and they may have to allow further rupee depreciation,” Kunal Sodhani, foreign exchange treasury executive at Shinhan Bank India, told the Economic Times.
Outlook for 2025
The rupee’s depreciation is in sync with broader trends among Asian currencies, which have weakened by over 2.5% since November, compared to the 1.39% decline of the rupee. Analysts predict further weakening of the rupee in the coming months, possibly breaching the 86-mark by the next quarter.
Traders are also eyeing geopolitical developments, including the inauguration of US President-elect Donald Trump in January, the Union budget and the monetary policy committee’s measures in February as key factors influencing the currency’s trajectory.
“The rupee must depreciate if the RBI wants to maintain its competitiveness. Plus, in REER terms, the Indian currency is overvalued,” Parmar added. “I think 2025 will be a year of volatility due to uncertainties from Trump’s administration.”
The RBI’s forex reserves have already seen a reduction of $60 billion since September.
It is interesting to note what Prime Minister Narendra Modi had said when the rupee fell during former Prime Minister Late Manmohan Singh’s tenure.
“The rupee is in the hospital and is admitted to the ICU,” Modi had said at an event in 2013.
On August 20, 2013, when the rupee had hit a then record low, Modi said, “In the last three months, even with the pace at which the rupee is falling the government is not doing anything. Once the rupee keeps falling, the world powers take full advantage of it; the government has totally failed to stop that.”
At another event on July 30, 2013, Modi said, “Today, the speed at which the value of rupee is falling, at times it seems that there is competition going on between the government in Delhi and the rupee on whose value is falling faster. When the country became independent, $1 was equal to Re 1. One dollar was sold for one rupee. When Atal ji’s government was there, when Atal ji formed the government for the first time, the value of rupee had reached Rs 42 and when Atal ji left it reached 44, there was a difference of 4 per cent. But this government has brought it to Rs 60.”
