The Indian Rupee dropped below the 95 mark against the US Dollar for the first time on Monday, reaching a historic low despite efforts by the Reserve Bank of India (RBI) to stabilize fluctuations. The Rupee declined to 95.20 per Dollar, a 0.3% decrease driven by global influences and ongoing foreign capital outflows. Although the RBI imposed stricter limits on banks’ foreign exchange positions, the Rupee received only temporary relief, as experts believe that fundamental factors are still unfavorable for the currency.
In response to the RBI’s directive issued late Friday, banks are required to limit their net open Rupee positions in the foreign exchange market to $100 million daily by April 10, aiming to reduce speculative activities and control market volatility. Consequently, banks are anticipated to sell Dollars in the local market to unwind existing arbitrage transactions that involved purchasing Dollars domestically and selling them in the non-deliverable forward (NDF) market to exploit price differentials between the two segments. The widening gap between the onshore and NDF markets in recent weeks, fueled by increased volatility due to risk aversion and heightened oil prices related to geopolitical tensions, has created arbitrage positions estimated at $25 billion to $50 billion.
Despite the RBI’s measures, the Rupee continues to face strong pressure, primarily from persistent foreign portfolio outflows and mounting worries about India’s economic prospects amid elevated oil prices. The surge in crude oil prices elevates India’s import costs and widens the current account deficit, adding strain on the Rupee. Simultaneously, global uncertainties stemming from geopolitical conflicts have dampened investor risk appetite, resulting in further capital outflows from emerging markets like India.
The Rupee’s depreciation coincides with a significant downturn in equity markets, with the Nifty 50 dropping approximately 2% on Monday and heading towards its most substantial monthly decline since March 2020. The combined impact of a weakening currency, escalating oil prices, and global uncertainties has led to subdued market sentiment overall. March has witnessed the Rupee depreciating over 4%, marking its worst monthly performance in more than seven years.
Analysts predict that unless there is a noticeable reduction in oil prices or a reversal in foreign fund flows, the Rupee is likely to face continued pressure in the short term.