The Indian rupee slid below the 95-mark against the US dollar for the first time on Monday, hitting an all-time low despite recent measures by the Reserve Bank of India (RBI) to control fluctuations. The rupee dropped to 95.20 per dollar, a 0.3% decline during the day, as global pressures and continuous foreign outflows weighed on the currency.
Although the RBI’s efforts to restrict banks’ foreign exchange positions provided temporary backing to the rupee, analysts suggest that fundamental factors are unfavorable for the currency. The central bank instructed banks on Friday to limit their net open rupee positions to $100 million daily by April 10 to reduce speculation and stabilize the currency market.
In response to the directive, banks are anticipated to sell dollars domestically by unwinding existing arbitrage activities involving the onshore and non-deliverable forward (NDF) markets. These arbitrage positions, estimated between $25 billion and $50 billion, have expanded due to escalating volatility triggered by risk aversion and higher oil prices associated with geopolitical tensions linked to Iran.
Despite the RBI’s interventions, the rupee remains under pressure due to persistent foreign outflows and mounting worries concerning India’s economic prospects amid elevated oil prices. The surge in crude oil prices elevates India’s import expenses, widening the current account deficit and exerting downward pressure on the rupee.
Simultaneously, global uncertainty stemming from geopolitical conflicts has diminished investor risk appetite, leading to increased capital outflows from emerging markets like India. The rupee’s depreciation coincides with a significant downturn in equity markets, with the Nifty 50 declining about 2% on Monday and heading towards its steepest monthly drop since March 2020.
The combined impact of a weakening currency, surging oil prices, and global uncertainties has sustained a negative market sentiment. The rupee has depreciated over 4% in March, positioning it for its poorest monthly performance in over seven years. Analysts suggest that unless there is a substantial reduction in oil prices or a reversal in foreign fund flows, the rupee is likely to face continued pressure in the short term.