Indian Rupee in Free Fall: From Asia's Best Performer to Underperformer

The Indian rupee has experienced a steep decline this quarter, transitioning from Asia's best-performing currency to one of the worst losers, and the downward trend may continue. In recent days, the currency has tested new lows due to capital outflows from local stock markets following an increase in stock taxes and due to dollar demand from importers. Any announcement of a policy shift by the central bank at its monetary policy meeting on August 8 could further weaken the rupee. Barclays forecasts a weakening to 83.85 against the US dollar in the near future, while Morgan Stanley sets a target of below 85.2 for the currency pair over the next year. The rupee ended Friday at 83.75, a decline of 1.3% from its peak in March 2024. Dilip Parmar, a currency analyst at HDFC Securities, stated that the rupee is underperforming compared to Asian currencies as foreign investors become net sellers of stocks due to risk aversion. He expects the rupee to move towards 84, with 'aggressive interventions' from the Reserve Bank of India likely at that point. Although the RBI is expected to keep interest rates stable this week, any move towards a neutral monetary policy could exert additional downward pressure on the rupee. The decline is expected to be gradual, as the central bank will likely continue to closely manage the currency to prevent excessive volatility. 'We believe that the RBI will give the USD/INR pair more flexibility,' wrote Min Dai, a strategist at Morgan Stanley, in a note. A rate above 83.70 is a good indicator of this. Interventions by the RBI have made the rupee one of the least volatile currencies in the world. As one of the few currencies that has remained unscathed by the strong dollar this year, it has moved within a tight range. Its counterparts have experienced fluctuations between losses and gains due to expectations of Federal Reserve rate cuts. The relative stability of the rupee against the dollar has also made it popular among carry traders who seek to profit from interest rate differentials. Many of these trades were disrupted by the recent resurgence of the Japanese yen, a preferred funding currency for carry trades. The recent underperformance of the local currency is partly due to the unwinding of carry trades, noted Barclays analysts, including Shreya Sodhani and Mitul Kotecha, in a note last week. In the mid-term outlook, they expect a gradual depreciation of the rupee.