A weak dollar hasn't prevented rupee from trading near record lows

Business Standard

4 hours ago

Despite the US dollar index weakening by 9.53 per cent in the current calendar year, the rupee is trading near its lowest against the greenback. The local currency has depreciated by 2.3 per cent in the current calendar year so far. The dollar index measures the value of the greenback relative to a basket of six currencies, including Euro, Yen, British Pound, Swiss Franc, Canadian dollar and Swedish Krona.
Market participants said that the domestic currency has remained under pressure despite favourable conditions from a weaker dollar, as subdued capital inflows and external headwinds weighed on investor sentiment. The recent US tariff hikes on Indian exports to the world's largest economy, of up to 50 per cent, have heightened trade tensions, dampened investor confidence, and triggered foreign portfolio outflows.
'It is only the tariffs, which is a concern right now. Otherwise, we typically weaken by 1 per cent to 2 per cent in a year. So, whatever excess weakness has happened is because of tariffs. We are expecting FY26 to close at an average rate of 87 per dollar,' said Abhishek Goenka, chief executive officer at IFA Global.
Higher US tariffs are believed to weigh on India's exports, leading to lower forex earnings for the country, and thus higher demand for the greenback in the domestic market.
Additionally, a surprise 50-basis-point policy rate cut by the Reserve Bank of India (RBI) in June eroded carry trade appeal and lowered forward premiums, leaving the rupee more vulnerable to external shocks.
Against other major currencies, Euro and British Pound, the rupee has witnessed 12 per cent and 7 per cent depreciation, respectively, so far. Analysts said that global investors are increasingly shifting capital towards developed markets, which are currently trading at record highs.
Foreign portfolio investors have net sold Rs 10,147 crore worth of equities so far in August (till 11th).
'The dollar index has softened, which means the dollar has weakened against other currencies like Euro and Pound in the basket because of tariffs,' said the treasury head at a private bank. 'The rupee is under pressure because of the continuous outflow from equities,' he added.
In early 2025, Europe's major currencies strengthened significantly against the US dollar as growing concerns over the US economic outlook prompted investors to shift portfolio allocations toward Europe and the UK.
The rupee had touched its record low of 87.95 per dollar on February 10, 2025. Between March and early July, it regained some ground, appreciating about 2.5 per cent to trade near 85.59 per USdollar on the back of improved trade sentiment, foreign portfolio inflows, and reduced speculative positions. However, renewed concerns on US tariff hikes, persistent capital outflows, and weakening investor sentiment in August pushed the rupee back toward its lows, hovering in the 87.80–87.88 range. RBI interventions in the spot and non-deliverable forwards (NDF) markets have so far prevented a breach of the 88 mark, said market observers.
On Monday, the rupee settled at 87.66 per dollar, flat against the previous close.
Latest data by the RBI show that the Real Effective Exchange Rate (REER) of the rupee fell to 100.36 in June, down from 101.12 in May.
The REER adjusts the Nominal Effective Exchange Rate (NEER) to account for inflation differentials between India and its major trading partners. A REER value above 100 indicates an appreciation of the rupee relative to the base year, potentially making Indian exports less competitive in global markets.
On the other hand, the RBI's interventions in the NDF and spot forex markets to avoid the rupee's decline past 88 per dollar resulted in a significant depletion of foreign exchange reserves, marking the steepest decline of 2025. India's foreign exchange reserves fell by $9.3 billion to $688 billion in the week ended August 1, the highest weekly fall since the week ended November 15, 2024.
The RBI sold around $6.9 billion in the spot market because the rupee was under pressure during the week, whereas, there was a revaluation loss of about $2.1 billion.