Indian Rupee Tumbles to Historic Low Amid Global Uncertainty
The Indian rupee plunged to a new all-time low of 91.58 against the US dollar on Wednesday, marking a significant decline from Tuesday's closing level of 90.98. This sharp depreciation was primarily triggered by escalating geopolitical tensions, which prompted stop-loss dollar purchases in the forex market, accelerating the currency's downward spiral.
Market Mechanics and Global Factors Drive Decline
According to KN Dey, a prominent forex consultant, the rupee's fall reflects a complex interplay of technical, flow-driven, and geopolitical elements. "The rupee is under sustained pressure, and today's move showcases a combination of these factors," Dey explained. "The immediate catalyst was the activation of stop-loss orders once critical support levels were breached, which rapidly intensified the selling pressure."
Dey highlighted that portfolio flows continue to exert a heavy burden on the currency. "Equity flows have remained persistently negative, with foreign investors being net sellers on most days this month. The cumulative outflow has been substantial, leading to heightened demand for dollars," he noted. Despite intermittent dollar supply from the Reserve Bank of India (RBI), the pressure on the rupee has not subsided.
Global Risk Sentiment and Policy Silence
The consultant pointed out that global risk sentiment has deteriorated sharply due to rising geopolitical tensions, unsettling financial markets and slowing capital inflows into emerging economies like India. He also remarked on the absence of verbal intervention from policymakers, which historically helped calm markets even without direct action. While the RBI has frequently intervened to smooth volatility, these measures alone have proven insufficient to reverse the negative sentiment.
Over the past year, the rupee has depreciated by more than 5%, sliding from approximately 86.50 when the current US administration began its term to around 91.40 now. This trend underscores the ongoing challenges facing the currency.
Budget Expectations and Trade Risks
Markets are closely watching the upcoming Budget for potential positive triggers, but expectations remain muted. It is uncertain whether the Budget will be robust enough to restore confidence among foreign investors or stem capital outflows. Additionally, trade-related risks persist, given India's exposure to Iran through energy imports and strategic projects, which could be impacted by any new tariffs or sanctions.
Historical Precedents and Current Challenges
In past episodes of financial stress, authorities have relied on decisive measures to shore up confidence, such as the FCNR swap in 2013 and earlier bond issuances during previous crises. Dey suggested that similar steps might now be necessary to mobilise $25–30 billion to stabilise the market.
While India's current account deficit remains manageable and is partly cushioned by services exports, the strain is evident on the capital account. Key observations include:
- Equity outflows have been substantial.
- Foreign Direct Investment (FDI) inflows remain weak.
- External Commercial Borrowings (ECBs) are becoming harder to manage, particularly for public sector entities.
Capital inflows are largely limited to FDI, portfolio flows, NRI deposits, and ECBs, all of which are currently under significant pressure, highlighting the need for strategic interventions to support the rupee.
