The Indian rupee continued its downward trajectory, closing at 84.49 per US dollar on Friday, a marginal fall of 2 paise from its previous close.
This depreciation was driven by significant foreign fund outflows and end-of-month dollar demand from importers, even as domestic equity markets and cooling crude oil prices provided some relief.
Market Dynamics
At the interbank forex market, the rupee opened at 84.49 and touched an intra-day low of 84.50, before ending the session at its opening level. The unit’s decline extended its weak performance over recent months, hovering near its all-time low of 84.50, recorded on November 21.
The rupee’s depreciation has been pronounced in the last six months, with the currency losing 1.6%, making it the second-worst performer among Asian currencies during this period. The South Korean Won led the decline, down by 2.1%, while the Japanese Yen and Thai Baht gained 3.6% and 6%, respectively.
Foreign Outflows Intensify Pressure
Foreign Institutional Investors (FIIs) have significantly reduced their exposure to Indian equities, withdrawing ₹11,756 crore on Thursday alone.
In October, FPIs pulled out nearly $11 billion, with an additional $1.5 billion withdrawn in November, marking a clear shift away from emerging market portfolios. Analysts estimate that for every $10 billion of stock market outflows, the rupee depreciates by approximately 0.5% against the US dollar.
External Factors Weigh on Sentiment
Global economic and geopolitical factors continue to impact the Indian rupee. Persistent dollar strength, reflected in the dollar index rallying nearly 6% over the past two months, has compounded the rupee’s struggles. The index, which measures the greenback against six major currencies, stood at 105.88, down 0.15% on Friday.
Additionally, geopolitical tensions, ongoing conflict between Russia and Ukraine, have heightened global risk aversion, pushing up demand for the dollar as a safe-haven asset. Brent crude prices, however, eased slightly, falling 0.30% to $73.06 per barrel, helping cushion some of the rupee’s losses.
Domestic Equity Markets Provide a Silver Lining
Despite the currency’s struggles, India’s equity markets have shown resilience. On Friday, the BSE Sensex surged 759 points (0.96%) to close at 79,802.79, while the Nifty 50 rose 216.95 points (0.91%) to settle at 24,131.10. Analysts suggest the robust performance of the equity markets could attract domestic investments, partially offsetting the impact of foreign outflows.
Rupee To Remain Under Pressure
The Indian rupee is likely to remain under pressure in the short term. Analysts at Mirae Asset Sharekhan predict a negative bias due to sustained dollar strength and geopolitical uncertainties. The month-end dollar demand from importers is expected to weigh further on the currency. However, positive domestic market cues and potential interventions by the Reserve Bank of India (RBI) may prevent sharp declines.
Barclays projects the USD/INR rate to touch 84.70 by the end of 2024 and 87.0 by late 2025. With India’s second-quarter GDP data due soon, market participants are watching for indications of economic strength that could provide some support to the rupee.
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