Indian Rupee Hits New Low as US Dollar Surges and FPI Selloff Continues
The Indian rupee has been in freefall, hitting a fresh low of 84.50 against the US dollar, as a combination of global and domestic factors weigh heavily on the currency. The main drivers of this decline include the strengthening US dollar, persistent foreign portfolio investor (FPI) selloffs, and increasing geopolitical uncertainties.
The US dollar index, which tracks the greenback's performance against a basket of major currencies, has surged by 3.10% in November alone. This rise has brought the dollar close to a two-year high, driven by expectations that the US Federal Reserve will hold rates steady, especially after the election of Donald Trump as President. These expectations are being reinforced by robust US economic data, including strong job reports, and statements from Federal Reserve officials suggesting there is no immediate need for rate cuts. As a result, the US dollar has gained considerable strength, pushing it to new highs. On the flip side, this strong dollar has placed downward pressure on emerging market currencies, including the Indian rupee.
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Further intensifying the rupee’s struggles is the continuous outflow of foreign capital from Indian markets. In November 2024 alone, FPIs have pulled out nearly ₹40,000 crore from Indian equities. This follows a record-breaking outflow of ₹1.14 lakh crore in October. Investors are reportedly concerned about high valuations in Indian stocks, weaker-than-expected corporate earnings, and potential slowdowns in economic growth. Additionally, global geopolitical tensions, including the ongoing Russia-Ukraine conflict, have contributed to a sense of market risk aversion, which has led to more capital flight from India.
Amid these challenges, the Reserve Bank of India (RBI) has been stepping in to limit the rupee’s fall, but the pressure remains. The RBI’s interventions have managed to prevent an even sharper decline, yet the rupee is still down nearly 0.5% in November. Comparatively, other Asian currencies have experienced even larger declines, highlighting the broad nature of the currency selloff.
With the political landscape in the US creating further uncertainties, experts are forecasting continued weakness for the rupee. Analysts predict that under a second Trump presidency, the rupee could depreciate by as much as 8-10% against the US dollar in the short term, before potentially stabilizing or recovering.
This weakening of the rupee presents a double-edged sword for India. On the one hand, it increases the cost of imports, which could fuel inflation, especially in commodities like oil. On the other hand, it could hurt Indian companies that rely on imported materials and equipment, potentially eroding their profitability. The depreciation also poses challenges for the RBI in controlling inflation, as the rising cost of imports could drive up prices across the economy.
Looking ahead, analysts suggest that the rupee’s weakness is likely to persist in the short term, as global risks, including geopolitical tensions and the global economic slowdown, continue to affect investor sentiment. The rupee's trading range is expected to remain between 84.35 and 84.65, with little immediate relief in sight. So, while the rupee's decline presents challenges, it also highlights the interconnectedness of global financial markets and the impact of international events on domestic economies.
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