The Indian rupee tumbled past the crucial psychological threshold of 90 against the US dollar on Wednesday, deepening a persistent eight-month decline. The currency's fall was fueled by a combination of dollar outflows for trade and investment and a scramble by domestic companies to hedge against potential further weakness.
Anatomy of a Decline: Outflows and Hedging Pressure
This year-to-date, the rupee has depreciated by 5% against the dollar, ranking it among Asia's poorest performing currencies. A significant factor is the impact of steep US tariffs, some as high as 50%, on Indian goods. These tariffs have severely crimped exports to the United States, India's largest market, diminishing the appeal of Indian equities for foreign portfolio investors.
The pace of the decline has been alarming. The rupee's drop from 85 to 90 took just under a year, which is less than half the time it took to fall from 80 to 85. On the global stage, India stands out as one of the markets hardest hit by portfolio outflows. Foreign investors have been net sellers of Indian stocks to the tune of nearly $17 billion so far in 2024.
Dual Pressure: FDI Slowdown and Trade Deficit
The weakness in foreign portfolio investment (FPI) coincides with a slowdown in foreign direct investment (FDI), compounding the pressure on the rupee. While India continues to attract gross investment inflows—which reached $6.6 billion in September—significant exits from the booming IPO market have resulted in net outflows. This is largely due to private equity and venture capital firms cashing out of their earlier investments.
Confirming the trend, the Reserve Bank of India (RBI) stated in its November bulletin that net FDI turned negative for a second straight month in September. This reversal was driven by a rise in outward FDI and the repatriation of existing investments.
Adding to the external sector stress, India's merchandise trade deficit hit a record high in October. This was propelled by the steep US tariffs and a sharp surge in gold imports. Concurrently, dollar inflows from overseas borrowings by Indian companies and non-resident Indian (NRI) bank deposits have also slowed.
Market Dynamics and RBI's Uphill Task
Bankers and traders report that each new phase of the rupee's slide, including Wednesday's breach of 90, triggers fresh dollar demand. Importers are particularly active in seeking dollars, while exporters are holding back their dollar sales, hoping for a better rate. This imbalance has left the currency vulnerable in the absence of strong, counterbalancing capital inflows.
Economists at HSBC noted that a gradually weakening rupee acts as a "shock absorber" for the economy and an automatic stabilizer for external finances, especially in the face of high tariffs. However, months of uncertainty over trade talks between New Delhi and Washington have distorted the foreign exchange hedging landscape. The situation has amplified hedging by importers while causing exporters to hesitate, leaving the RBI to manage the resulting currency pressure.
Although the central bank has intervened intermittently to slow the depreciation, bankers say the scale and persistence of dollar demand—from both outflows and importer hedging—continues to cast a shadow over the rupee. The RBI's efforts to support the currency are evident in the decline of India's foreign exchange reserves and the expansion of its short US dollar positions in the FX forward market to a five-month high of $63.4 billion.
