The rupee has once again faced a tough trading session, sliding to a new record low against the dollar for the third consecutive day. On Thursday, it ended at 85.26, a decline of six paise from its previous close. The currency also touched an all-time intraday low of 85.28, as strong dollar demand overshadowed sellers in year-end trading activities.
“The rupee weakened marginally due to the dollar index maintaining elevated levels near 108. Foreign institutional investors continued to exhibit caution, refraining from long positions in Indian markets. This restrained the rupee’s attempts to stabilize,” noted Jateen Trivedi, VP (research analyst) at LKP Securities.
In the near term, the rupee is expected to trade within a narrow range of 85 to 85.45 as it battles multiple headwinds. Market participants anticipate a challenging road ahead, with the rupee striving to regain lost ground amid global and domestic economic uncertainties.
Real Effective Exchange Rate Sparks Overvaluation Concerns
Adding to the challenges, the Reserve Bank of India’s (RBI) Bulletin highlighted that the real effective exchange rate (REER) had surged to a multi-year high of 108.14, sparking fears of overvaluation. The REER measures the rupee’s value against a basket of currencies, factoring in inflation differentials.
Dealers attribute the rupee’s decline to global economic turbulence and domestic macroeconomic struggles. Despite RBI’s periodic interventions to support the currency, the rupee remains vulnerable to sustained dollar strength and tightening global financial conditions.
The dollar has consistently gained strength against the rupee over the last two months. This rise is fueled by increasing US bond yields and expectations of slower-than-anticipated Federal Reserve interest rate cuts in 2025. These factors continue to make the dollar an attractive option for global investors, further weighing down the rupee.
On Thursday, India’s equity markets exhibited stability, with the Sensex closing nearly flat at 78,472 points, while the Nifty edged slightly higher to 23,750. However, the subdued market sentiment reflects broader concerns over currency volatility and economic uncertainty.
Outlook for the Rupee
The rupee’s journey ahead appears fraught with challenges as it attempts to navigate a complex economic landscape. Global factors such as rising dollar demand and tightening monetary policies, coupled with domestic issues like inflation and fiscal concerns, are likely to test its resilience. While the RBI’s interventions may offer some relief, experts suggest the rupee may face further depreciation before finding a stable footing.
As the year winds down, traders and investors remain watchful, anticipating further developments that could impact the rupee-dollar equation in the coming months.