The rupee was down 0.28% at 89.7975 per dollar, inching past Monday’s all-time low of 89.7575. It briefly fell to 89.85, at risk of slipping past the 90 level before the Reserve Bank of India intervened to stem the decline.
“We expect RBI to actively intervene to cap USD/INR,” analysts at MUFG Bank said in a note.
The currency is losing ground despite robust economic growth in India in the quarter through September and low inflation that would typically lend support to the currency.
Those fundamentals have been set aside by investors focused on currency flow dynamics, with both portfolio and investment inflows remaining tepid while India’s trade deficit has been widening.
India’s ballooning trade deficit is expected to push the current account deficit wider in the ongoing fiscal year, economists say.
HSBC forecasts that India’s current account deficit will rise to 1.4% of GDP in the current fiscal year from 0.6% last year.
Underlying fundamentals point to further rupee weakness, suggesting the RBI may eventually allow the currency to slip past 90 over time, according to MUFG Bank.
Alongside the prospects of a wider current account deficit, foreign investors have withdrawn nearly $17 billion from Indian equities year-to-date. .
Adding to the rupee’s woes has been a pick-up in hedging by importers, who are increasingly front-loading their dollar purchases on expectations that the rupee will weaken further.
Bankers say this has amplified pressures on the rupee. On the other hand, exporters have been slow to hedge, preferring to delay currency conversions in anticipation of better levels.
The lack of a U.S-India trade deal has been a drag on the rupee’s outlook, rather than what many analysts had expected to be a meaningful catalyst for improvement in sentiment around the Indian currency.
The RBI has been consistently present in the foreign-exchange market, stepping in to slow the rupee’s slide. For several weeks, the central bank had defended the 88.80 level, traders say.
Once that level finally gave way, the rupee faced incremental depreciation pressure, cumulating in a move to near the 90 mark.
