Rupee May Continue To Touch Fresh Lows As Dollar-Demand Rises

The Indian rupee may continue to depreciate further and hit new lows of 83.84 against the dollar, according to traders.

The local currency will likely weaken in the near term due to the greenback's demand from oil importers and unwinding in the USDJPY, according to traders and forex dealers. The Reserve Bank of India may prevent a runaway depreciation, though, with support from record-high foreign exchange reserves.

Most traders are expecting the rupee to fall to 83.84 against the greenback by early August. The broader range for the near term is 83.50–83.80 a dollar.

The rupee closed flat at Rs 83.70 against the greenback on Thursday. It had closed at a record low for the second consecutive session at Rs 83.71 on Wednesday, during which it fell to an all-time intraday low of 83.73 a dollar. The currency has been touching fresh lows since Monday, according to data on Bloomberg.

Importers have been aggressively purchasing the US currency to benefit from a relatively lower rate of crude oil prices for the past couple of weeks, according to forex traders.

The September contract for crude oil on the Intercontinental Exchange has fallen 7% to $81.71 a barrel on Wednesday from $87.95 on July 5. The decline in the price came amid concerns of an economic slowdown in China, the biggest importer of the commodity. As of 4:15 p.m., the crude oil price was at $80.30 per barrel.

To add to the Indian unit's woes, Union Budget 2024–25 shocked the market with a rise in short-term and long-term capital gains tax, which sparked a foreign fund outflow from domestic equities.

The tax on STCG was raised to 20% from 15% before and on LTCG to 12.5% from 10%. The benchmark NSE Nifty 50 and S&P BSE Sensex declined 0.30% and 0.48% from July 23.

"The general buying of dollars is happening in the foreign exchange market from oil importers, and there's sudden demand from segments of the equity markets," VRC Reddy, head of treasury at Karur Vysya Bank, said. "These are occasional, and in such times, the rupee depreciates. At that time, the central bank intervenes and restricts the particular range."

The bigger concern rose from the unwinding of long positions on the Japanese yen as it started to strengthen against the dollar. Ideally, the Japanese yen has been used in carry trade because it is a low-yielding currency. In situations where the yen appreciates against the dollar, the carry trade would yield a loss. That is when the market starts buying more dollars.

The Japanese yen rose 1.59% to 153.11 against the greenback on Wednesday, according to data on Bloomberg. The US dollar index traded 0.20% lower at 104.19 as of 4:15 p.m. on Thursday.

"Basically, there are three or four factors. One is carry-trade unwinding due to the Japanese yen moving up; a lot of buying from importers," Anil Bhansali, executive director of Finrex Treasury Advisors LLP, said. "Mostly, importers are unhedged, and exporters are hedged. Oil companies are there, and (the) FPIs are active in the market in buying dollars."

The central bank may absorb any excess inflows from the foreign exchange market to prevent the Indian currency's appreciation against the dollar. This was visible when it bought dollars after India's inclusion in the JP Morgan Emerging Market index led to higher inflows.

India's foreign exchange reserve rose by $9.7 billion to a record high of $666.85 billion as of July 12, according to data released by the RBI's official website last Friday.

"The RBI tries to curtail excess volatility, if any. Market has seen interventions at intervals by the central bank, but importantly, the focus remains on building reserves. So, it remains ready in terms of any kind of uncertainty," said Kunal Sodhani, vice president, Shinhan Bank. "At a time when overall flows for India are positive, so without much depreciation of rupee, foreign exchange reserves are built," he said.

Market participants will closely watch upcoming economic indicators—the gross domestic product and the Personal Consumption Expenditure index from the US—which will provide fresh cues about the Federal Reserve's monetary policy outlook.

Correction: In the 10th paragraph, "short positions on the Japanese yen" was corrected to "long positions on the Japanese yen".