Rupee hits record low before recovering; RBI intervention limits volatility amid challenges

Despite this recovery, the currency’s losing streak extended to a seventh consecutive week.

The rupee ended the session at 85.0150 against the U.S. dollar, improving from the previous close of 85.07, after earlier hitting a low of 85.10. On a weekly basis, the rupee declined by 0.2%.

Traders attributed the rupee's initial support to intervention by the Reserve Bank of India (RBI), coupled with significant dollar selling by foreign banks later in the session, likely linked to FTSE’s equity index rebalancing.

Routine RBI interventions throughout the week helped mitigate sharp depreciation as the rupee fell below the critical 85 level.

Weak capital inflows and concerns over India’s slowing economic growth have weighed heavily on the rupee.

These issues were exacerbated by the Federal Reserve’s hawkish policy update on Wednesday, which reduced projected rate cuts for 2025, reflecting persistent inflation.

On Friday, the dollar index dipped by 0.2% to 108.2, retreating from a two-year high, while Asian currencies showed mixed performance as markets awaited the U.S. personal consumption expenditure (PCE) inflation data.

The Fed’s policy shift has intensified focus on the inflation data, with core PCE inflation for November expected to slow to 0.2% month-on-month from 0.3% in October.

“The prospects remain favourable for the U.S. dollar in the near term, as investors see the U.S. economy as well-positioned for sustained growth into 2025,” MUFG Bank stated in a note.

Factors driving the rupee’s decline

Concerns over India’s slowing economic growth, which has fallen to a seven-quarter low, along with a widened merchandise trade deficit, have undermined investor confidence. The Federal Reserve’s reduced rate-cut projections for 2025, driven by persistently high inflation, have further strengthened the U.S. dollar, putting emerging market currencies like the rupee under pressure.

“Higher trade deficits and slow growth are testing the rupee, with domestic equity outflows adding to the pressure. Positionally, 84.70 serves as a good base for USD/INR, with room for movement towards 85.50,” said Kunal Sodhani, Vice President at Shinhan Bank India, in remarks to Reuters.

Adding to the rupee's challenges, the dollar index remained near a two-year high of 108.4, supported by better-than-expected U.S. GDP growth and a notable drop in weekly jobless claims.

Foreign investors sold nearly $500 million worth of Indian equities on Thursday, further straining the rupee. However, regular interventions by the RBI have ensured the rupee’s volatility remains relatively subdued compared to its Asian peers.

Investors now await the U.S. core PCE inflation data, the Federal Reserve’s preferred gauge of inflation, due later on Friday, which could influence currency markets further.