INR vs USD: Rupee underperforms Asian peers against the sinking US dollar. Here’s why
INR vs USD: Rupee underperforms Asian peers against the sinking US dollar. Here’s why
The Indian rupee appreciated slightly against the U.S. dollar recently, reaching 83.8475, but it remains one of the worst-performing Asian currencies. Despite a weaker dollar index, the rupee has struggled due to several factors:
- RBI Interventions: The Reserve Bank of India’s interventions have kept the rupee within a narrow trading range.
- High Dollar Demand: Importers and capital outflows from equities have maintained demand for the dollar.
- Trade Deficit and Yuan Strength: A widening trade deficit and the appreciation of the Chinese yuan have added pressure.
These factors combined have limited the rupee’s potential
Why is Rupee underperforming?
The underperformance of rupee against the Asian peers can be attributed to the Reserve Bank of India’s (RBI) deliberate interventions, aimed at stabilizing the USDINR around the 83.90 – 83.95 range, analysts said.
“Despite a notable decline in the US dollar index, which typically supports the appreciation of emerging market currencies, the rupee has struggled to show significant upward momentum. This is attributed not only to the RBI’s interventions but also to strong dollar demand from importers and capital outflows from Indian equities, both of which have capped the rupee’s gains in recent sessions,” said Amit Pabari, Managing Director at CR Forex Advisors.
The foreign institutional investors (FII) have net pulled out more than ₹30,500 crore from Indian equities so far in August.
Another key factor pressurising the rupee is the appreciation of the Chinese Yuan.
“Since the start of the month, the Yuan has strengthened by over 1%, casting a shadow over the Indian rupee. Given India’s substantial trade deficit with China, any appreciation in the Yuan could drive up import costs, adding pressure on the rupee,” Pabari noted.
Additionally, widening of India’s trade deficit also weighed on the rupee. India’s trade deficit in July widened to the highest level in the last 9 months to $23.5 billion.
“Heavy FII selling in the month of August and concerns over the widening of India’s trade deficit pressurisied the local currency. Interventional by the RBI is likely to keep rupee in the range of 83.70 – 84.00 levels,” said Ajay Kedia, Director, Kedia Advisory.
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Jigar Trivedi, Senior Research Analyst – Currencies & Commodities at Reliance Securities noted that the dollar index dropped by more than 3% in August and 0.62% year-to-date (YTD), yet the USDINR has not reacted inline with the dollar decline.
“Even amid a heightened geo-political risk in the Middle-east, the safe haven buying has failed to push the dollar higher. We are of the opinion that the RBI is cautious of extreme volatility and acts as per the situation demands on both the sides,” said Trivedi.
Rupee Outlook
According to Pabari, the rupee is expected to remain within a narrow range.
“In the near term, it is likely to trade between 83.75 and 84.00, with a slightly broader range of 83.60 to 84.00 anticipated in the medium term. While strong fundamentals suggest a stronger rupee, the central bank’s increasing interventions may cap further appreciation,” Pabari said.
Jigar Trivedi believes for now, 84.20 is a cap for USDINR, while 83.70 – 83.50 levels will act as a floor on the downside.