Indian Rupee Depreciates Further Despite Capital Outflows and RBI Interest Rate Hike
On Friday, the Indian rupee closed at 96.73 against the dollar, showing little change from the previous day. Although the Reserve Bank of India (RBI) raised interest rates for the first time in nearly four years, the rupee continued to decline on a weekly basis.
No Significant Impact from Interest Rate Hike
Typically, interest rate hikes attract foreign investment, which can strengthen the currency; however, this time the impact on the rupee was minimal. Traders attribute the pressure on the currency to two factors: importers taking measures to hedge against further volatility, and foreign investors withdrawing capital from the Indian stock market.
The rupee is hovering near its all-time low of 96.96—a level it touched in May.
Central Bank Intervention
On Friday, state-run banks were observed selling dollars—a move likely made at the behest of the RBI. This selling helped prevent the rupee from falling further. The central bank has intervened in the market several times this year to slow the pace of the currency's depreciation.
These measures have come at a cost. As of October 2, India's foreign exchange reserves fell for the fourth consecutive week to $734.6 billion. This figure is approximately $50 billion lower than the record high reached in September. Dim Prospects
Analysts surveyed by Reuters believe the rupee will hover near record lows over the next three to six months. MUFG also anticipates a gradual depreciation of the currency, forecasting an exchange rate of 97.50 rupees per dollar by September 2027. The bank expects that the Reserve Bank of India's (RBI) substantial reserves will limit further depreciation of the rupee.
Options traders are also betting on a decline in the rupee's value. There has been high demand for contracts that profit from a depreciation of the rupee, while demand for contracts that benefit from an appreciation has remained low.
Global conditions have improved somewhat, with both oil prices and the dollar retreating from their recent highs. However, the rupee has not yet derived any significant benefit from these developments.
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