Rupee hits record low, logs lowest in 7 months as demand for dollar rises
The rupee fell sharply on Friday, closing at 85.5325 against the US dollar, marking a one-day decline of 0.3 percent—its worst performance since June 2024. The currency fell to 85.8075 before the Reserve intervened. The Bank of India (RBI) helped stabilize the losses. Persistent dollar bids from major expiring and December currency futures contracts added pressure, fueling panic buying among importers.
Traders noted that the RBI initially shied away from intervening, allowing market forces to drive the rupee lower. However, late intervention prevented further losses, providing temporary relief.
Widespread concerns about the trade deficit and growth
The continued weakness of the rupee reflects growing concerns about India’s slow economic growth and widening trade deficit. External factors, including a strong US dollar driven by the Federal Reserve’s hawkish stance, have increased these pressures. Additionally, expectations surrounding monetary and trade policies under the incoming US administration have impacted the global dollar’s strength.
Abhishek Goenka, CEO of IFA Global, emphasized that the rupee’s real effective exchange rate (REER) remains overvalued, indicating the need for further adjustment to improve competitiveness. In November, the REER reached a multi-year high of 108.14, indicating an eight percent higher rating compared to peers.
Market response and outlook
The RBI’s decision to allow a gradual devaluation suggests a limited approach to aligning the rupee with market fundamentals. While the strategy may improve export competitiveness, it also raises concerns about struggling foreign industries and inflation-sensitive sectors.
Globally, the dollar index stood firm at 108.1, while most Asian currencies fell between 0.1 percent and 0.4 percent. Analysts expect the rupee to remain under pressure, driven by continued demand for the dollar and ongoing macroeconomic challenges.
Eight consecutive weeks of losses underscore the challenges for India’s currency, which requires careful monitoring by the central bank and market participants to deal effectively with volatility.
