Indian Rupee faces slow grind lower on oil and China rotation risks

By Subhadip Sircar
 

The Indian rupee, which fell past 84 to the dollar to hit a new record low this month, is on a downward path as geopolitical risks boost oil prices and as money flows out of local stocks amid a shift toward China.
 

Barclays Plc. points to record-high gold prices, a stronger dollar, and increased risk aversion as reasons why the central bank may allow the rupee to decline. The lender predicts the currency to gradually fall toward 84.40 per dollar, while researcher QuantEco Research targets 84.50 and Kotak Mahindra Bank Ltd. expects a decline to 84.25.

“Global headwinds from geopolitical risks and slower pace of monetary easing in the US amid robust data are expected to weigh on the rupee in the near term,” said Upasna Bhardwaj, chief economist at Kotak in Mumbai. Foreign portfolio outflows from India and other EMs are a reflection of this uncertainty as funds move to China on hopes of its recovery, she said.

Global funds have pulled $9.1 billion from Indian equities this month amid expensive valuations and a shift toward China. Even India’s index-eligible bonds, which had been luring about $2 billion in inflows each month since their inclusion in global bond indexes in June, saw two straight weeks of outflows this month.

The rupee fell to a record low of about 84.10 to a dollar earlier in October, and closed at 84.07 on Monday. Barclays strategists led by Lemon Zhang believe the Reserve Bank of India let the rupee fall past 84 because of the sharp rally in the currency’s nominal effective exchange rate since end-September. 

Traders said the central bank had defended the 84 level for two months, armed with almost $700 billion in foreign reserves. The authority’s tight grip over the currency has kept speculators at bay, making a sharp depreciation unlikely and turning the rupee into one of most stable among emerging markets.

This strategy has meant the rupee has outperformed its Asian peers during periods of dollar strength, and lagged behind when the greenback weakened. 

“We’re not managing the exchange rate — the rupee is depreciating vis-a-vis the dollar and we buy dollars whenever there is an opportunity,” Governor Shaktikanta Das said at a Bloomberg event on Friday.

Higher US yields ahead of the US elections next month and a possible slowdown in debt flows may contribute to the pressure on the rupee, according to Elara Securities.

“We see the rupee gradually moving into a zone where the risks are becoming more prominent vs one-two quarters ago,” Garima Kapoor, an economist at Elara, wrote in a note. The firm has lowered its rupee forecast to 83.5 from 82.8 previously for fiscal 2025, with risks on the downside.