Indian Rupee Hits Record Low: Key Drivers Behind The Epic Decline And Market Impact in 2024

The Indian rupee is facing significant downward pressure, edging closer to an all-time low against the US dollar.

Understanding the Indian Rupee’s Decline. On Tuesday, the rupee is expected to open weaker, potentially reaching a historic low of near 84/USD, driven primarily by dollar demand in the non-deliverable forward (NDF) market and adjustments in expectations for US Federal Reserve rate cuts.

Current Market Dynamics

NDF Market Influence

Non-deliverable forwards (NDF) have indicated a potential opening range for the rupee between 83.97 and 83.99 against the US dollar. This projection surpasses Monday’s closing rate of 83.8450, marking an all-time low. The 1-month dollar/rupee NDF rate surged to 84.25 overnight, reflecting concerns over the unwinding of the Japanese yen carry trade. However, it later retraced slightly, last trading around 83.06/83.08.

Federal Reserve Rate Expectations

The anticipation of Federal Reserve actions plays a critical role in currency markets. The slight trimming of expectations for US Federal Reserve rate cuts has added to the upward pressure on the USD/INR pair. Investors, who were previously pricing in a 125 basis point cut for the year, have now adjusted their expectations to 110 basis points following recent economic data and comments from Federal Reserve officials.

Reserve Bank of India Intervention

The Reserve Bank of India (RBI) has been actively intervening in the onshore over-the-counter market to stabilize the rupee. Without these interventions, the rupee’s losses on Monday could have been more pronounced. In the onshore market, there is a higher level of comfort regarding RBI’s intervention compared to the NDF market, providing some support to the rupee.

Global Market Reactions

Equity Markets

Asian shares have shown signs of recovery following Monday’s selloff, which was fueled by recession worries in the US. Notably, Japan’s equity gauge surged by about 10%, US equity futures advanced, and Indian equities were poised for a higher opening. These movements have provided some stability to risk assets, offering a slight reprieve to the downward pressure on the rupee.

Economic Indicators

The stability in risk assets has been bolstered by positive comments from Federal Reserve officials, who indicated that a weak July jobs report does not necessarily point to a recession. Additionally, robust US services data has suggested that the economy is still growing, adding jobs, and experiencing inflation above target levels. This optimistic outlook has helped to support investor sentiment, despite ongoing concerns.

Insights from Currency Traders After Indian Rupee Decline

Currency traders have observed that the upward pressure on the USD/INR pair is quite evident. The rupee’s recent performance in the NDF market underscores this sentiment, as does the broader trend in dollar demand. Traders note that the RBI’s interventions have been crucial in mitigating larger losses, highlighting the central bank’s role in managing market volatility.

Future Outlook

The outlook for the Indian rupee remains uncertain, influenced by a complex interplay of global and domestic factors. Key elements to watch include:

Federal Reserve Policy: Any changes in expectations for US Federal Reserve rate cuts will continue to impact the USD/INR pair. Investors will be closely monitoring economic data and Federal Reserve communications for further indications.
RBI Interventions: The extent and effectiveness of RBI interventions in the onshore market will be crucial in determining the rupee’s trajectory. Sustained support from the central bank could help stabilize the currency.

Global Economic Conditions: Broader economic trends, including the performance of Asian equities and global risk sentiment, will play a significant role. Positive developments in these areas could provide some support to the rupee.
NDF Market Trends: Movements in the NDF market will continue to influence expectations and trading strategies. Traders will be paying close attention to any shifts in dollar demand and forward rates.

In a Nutshell

The Indian rupee’s decline to near 84/USD represents a significant development in currency markets, driven by NDF dollar demand and shifting Federal Reserve rate expectations. While RBI interventions have provided some support, the rupee remains under pressure due to broader global economic conditions. Investors and market participants will need to navigate these complex dynamics carefully, staying informed about key trends and potential future developments.