Economy
Mint Primer: Is the rupee on course for a bottomless fall?
Summary
- On Monday, the rupee breached the psychologically important 87 per dollar level when President Donald Trump threatened to impose 25% tariffs on Canada and Mexico.
The days of stability in the currency market seem to be over as the rupee keeps racing to new bottoms against the dollar. Unlike the past couple of years, the rupee has been the worst performer among its emerging market peers so far this year. Mint explains why.
What triggered the new lows?
On Monday, the rupee breached the psychologically important 87 per dollar level when President Donald Trump threatened to impose 25% tariffs on Canada and Mexico. Threats of looming US trade wars, especially with China, rattled the currency market. This triggered panic buying among importers in anticipation of a costlier dollar. On Wednesday, currency traders increased their bets of a potential interest rate cut in the RBI’s upcoming policy meet on Friday, adding to the depreciation pressure. Expectations of a narrower US-India interest rate differential led to more dollar flight.
What role are tariffs playing?
Experts think domestic macro fundamentals have less bearing on the rupee’s current depreciation. Rather a strong US economy and anticipation of higher inflation and eventually lower interest rate cuts in the US have been propelling the dollar to new highs. President Trump’s tariff threats have been adding fuel to the fire. Tariffs raise import costs, making inflation stickier in an economy. The dollar index rose to almost 110 on Monday amid tariff scares but retreated to the 107 zone upon no immediate action. Meanwhile, global markets remain cautious of Trump’s 10% tariff imposition threats to China.
Are other currencies doing equally badly?
Yes and no. The dollar has been crushing most of its rivals especially since Trump won the election last November. Subdued US exports, particularly to China, have also kept dollar supply low and its price high in the rest of the world. But its rise against the rupee has been harsher than emerging market rivals—due to lower intervention from the RBI compared to last year.
How are FIIs adding to the pain?
A falling rupee reduces the returns for FIIs in dollar terms. Low corporate earnings and expensive valuations have led to relentless FII selling of Indian equities. FIIs pulled $8.4 billion out of the equity market in January, the second highest outflow since October, further exerting pressure on the rupee. High US Treasury yields, and a booming US stock market have also reduced the risk-return appeal of Indian stocks. Experts see no respite to FII selling in the stock market until the dollar stops strengthening.
Read more: Shorts on Nifty, Bank Nifty hit record high. Are FPIs bracing for a market shock?
What is in store for next month?
The outlook for the rupee remains bleak and hinges on future tariff moves by Trump. “If he imposes tariffs on China, the dollar index will breach 110 and lead to a sharper fall in the rupee," Anindya Banerjee, head of currency and commodity research at Kotak Securities told Mint. Until then he expects the rupee to end FY25 at 88 per dollar level. However, this floor remains fragile as a potential rate cut and continuous FII capital outflow put pressure on the rupee. Experts anticipate more volatility going ahead.
