Reuters

By Nimesh Vora

MUMBAI (Reuters) – Well, it seems the Indian rupee has taken quite a tumble, hasn’t it? For the first time on a Monday, it plummeted past the 86 mark against the U.S. dollar. All thanks to a rather impressive U.S. jobs report, which has merely added to the existing woes from weak foreign inflows and increased hedging activity.

## The Currency Conundrum

The rupee’s decline is, by all accounts, a persistent bane. It’s been caught in a downward spiral for over three months now. Volatility gauges have certainly jacked up. This was further exacerbated as the rupee fell 0.4% to a record low of 86.3900 per dollar, echoing its fellow Asian currencies who staggered under the weight of robust U.S. nonfarm payrolls data. Such figures paint an astonishingly resilient picture of the U.S. economy.

Weak portfolio flows continue to exert pressure on the rupee. Notably, foreign investors have withdrawn over $4 billion from Indian equities just this month. This follows a hasty retreat of nearly $11 billion last quarter alone. The apprehension surrounding former President Trump’s policies has given further momentum to speculators, leading them to fortify their bearish positions on the rupee, thus heightening the hedging activity.

## Perspectives and Predictions

Brad Bechtel, a chap well-versed as the global head of foreign exchange at Jefferies, remarked, “The rupee’s continued decline ‘probably makes a lot of sense'”. The momentum and the real effective exchange rate (REER) suggest that the rupee’s current predicament might actually be quite logical.

### Currency Overvaluation

– The rupee’s 40-currency trade REER indicates it’s the most overvalued it’s been in two decades.
– A change in leadership at India’s central bank has sparked hopes for a more adaptable exchange rate policy.

In light of these observations, Bechtel anticipates the rupee weakening further to perhaps 88 in the “near-to-medium” term. The analysts over at ANZ Bank echo this sentiment, prognosticating that such a level might be seen by March. They expressed this view in a nuanced note last week, stating that the currency’s loss in competitiveness, driven by its lofty REER, is paramount.

Moreover, they emphasized, “The moderating business cycle warrants a weaker currency”, which may very well be the case indeed.

(Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala and Savio D’Souza)