Rupee retreats, but holds its ground amid dollar surge and Asian rout

At 11:02 AM IST, the rupee stood at 82.9750 per dollar, down from 82.88 in the previous session. While marking a minor depreciation, the rupee’s fall was considerably less pronounced than the dive experienced by other Asian currencies.

The Indian rupee retreated on Tuesday, caught in the slipstream of a resurgent dollar fueled by rising U.S. Treasury yields and waning risk appetite across Asia. However, the rupee’s decline remained relatively muted compared to its regional peers, hinting at continued underlying support for the currency among a majority of interbank traders.

At 11:02 AM IST, the rupee stood at 82.9750 per dollar, down from 82.88 in the previous session. While marking a minor depreciation, the rupee’s fall was considerably less pronounced than the dive experienced by other Asian currencies. For instance, the offshore Chinese yuan plummeted to its lowest level in over a month, sinking to 7.1950, while the Korean won witnessed a sharp 0.8% drop, hitting its lowest point since early November.

Despite the rupee’s relative resilience, analysts acknowledged the downward pressure exerted by the strengthening dollar. Higher U.S. Treasury yields, reflecting expectations of tighter monetary policy by the Federal Reserve, have fueled a global flight to safety, boosting the dollar as a haven currency. This risk aversion further intensified the pressure on emerging market currencies, including the rupee.

However, interbank traders expressed optimism about the rupee’s prospects, suggesting that the current dip might be temporary. A spot foreign exchange trader at a private bank remarked that while the rupee is likely to track the downward trend in Asia, it “will lack much follow through.” His assessment indicates a belief that the rupee’s decline won’t be as severe as those observed in other regional currencies.

This viewpoint was echoed by an FX head at a public sector bank, who acknowledged the recent “decent recovery” in the dollar-rupee pair from Monday’s low but clarified that it doesn’t negate the downtrend witnessed over the past two weeks. This suggests that market forces are currently dictating a gradual and controlled depreciation for the rupee, rather than a sharp and erratic freefall.

Further stressing this sentiment, brokerage firm Motilal Oswal anticipates the dollar-rupee pair to trade with a “sideways-to-lower” bias in the near term. They placed resistance levels around the current mark, implying that significant upward movement for the dollar against the rupee is unlikely in the immediate future.

Overall, while the Indian rupee experienced some depreciation on Tuesday, it managed to outperform its Asian counterparts, exhibiting relative resilience in the face of a global dollar rally. This resilience points towards continued underlying support for the rupee among interbank traders, who seem confident about the currency’s ability to weather the current headwinds and maintain its downward trajectory in a controlled manner.

Global Headwinds:

  • U.S. monetary policy: The Federal Reserve’s path of interest rate hikes and quantitative tightening will remain a primary driver of dollar strength. If the Fed adopts a more aggressive stance than anticipated, it could trigger further capital outflows from emerging markets like India, putting downward pressure on the rupee. Conversely, a slower pace of tightening could ease pressure on the currency.
  • Geopolitical tensions: The ongoing war in Ukraine and any escalation in other geopolitical flashpoints could lead to risk aversion and a flight to safe-haven currencies like the dollar, impacting the rupee indirectly.
  • Global economic slowdown: A potential recession in major economies like the U.S. and Europe could dampen global trade and demand for Indian exports, impacting the rupee’s value through reduced foreign exchange inflows.


Domestic Landscape:

  • Government policy: The Indian government’s policies on foreign exchange inflows and outflows, trade and investment will play a crucial role in influencing the rupee’s stability. Measures to boost exports, attract foreign investment, and manage current account deficits could offer support to the currency.
  • Inflation and interest rates: Domestic inflation levels and the Reserve Bank of India’s (RBI) response through interest rate adjustments will determine the attractiveness of the rupee as an investment. Higher inflation and rising interest rates could potentially attract foreign capital and strengthen the rupee, while lower rates could lead to depreciation.
  • Structural reforms: Implementing structural reforms to improve India’s investment climate, infrastructure, and manufacturing sector could attract foreign investment and boost long-term economic growth, indirectly impacting the rupee positively.


Scenarios for the Rupee:

Based on these factors, the future of the rupee could unfold in several ways:

  • Gradual Depreciation: This scenario assumes a controlled decline of the rupee in line with a weakening global economy and rising U.S. interest rates. The RBI manages the depreciation through intervention and policy adjustments, maintaining currency stability within a manageable range.
  • Resilient Stability: If India’s domestic economic fundamentals remain strong, attracting foreign investment and mitigating capital outflows, the rupee could exhibit continued resilience, resisting significant depreciation even amidst global headwinds.
  • Sudden Volatility: Unforeseen events like a sharp escalation in geopolitical tensions or a major financial crisis could trigger sudden volatility in the currency market, impacting the rupee more severely than anticipated.