INR vs USD: Why is Indian rupee falling despite dropping US dollar rates?

INR vs USD: The Indian rupee has remained range-bound despite a weakening US dollar and favourable global factors, including declining crude oil prices and strong foreign institutional inflows (FII) into the Indian stock market.

The US dollar index slipped to multi-month lows of around 101 level from a three-month high of 106.00, nearly 5%, as investors ratcheted up bets for a super-sized interest rate cut by the US Federal Reserve next week.

While most Asian currencies have strengthened against the dollar, the rupee has traded within a broader range, failing to capitalize on the dollar's decline and other positive market conditions.

Analysts attribute this lack of appreciation to the Reserve Bank of India's (RBI) active intervention in the foreign exchange market through substantial dollar purchases.

“The US dollar index has fallen from a level of 106 to around 101 in the past three months. Simultaneously, Asian currencies have appreciated against the greenback. The likely interest rate cuts by the US Fed, a sharp drop in crude oil prices and consistent foreign institutional inflows into Indian stock markets are supportive factors for the rupee. However, the local currency has not appreciated; rather, it remains weak against the US dollar,” said Amit Pabari, MD, CR Forex Advisors.

The reason behind the rupee remaining in a range, Pabari explained, is the heavy intervention by the RBI.

“RBI has been absorbing most dollar inflows into the economy. This consistent dollar buying by the central bank has not allowed the rupee to appreciate,” Pabari said.

Meanwhile, the local unit has also not depreciated beyond the level of 84 a dollar.

One of the key reasons why RBI is preventing INR from falling beyond 84/USD is India’s high trade deficit with China, along with appreciating the Chinese yuan against the dollar.

“Indian rupee is weakening against China’s currency. This adds to India’s trade deficit with China. Hence, RBI likely keeps intervening to prevent rupee’s more,” Pabari said.

Jigar Trivedi, Senior Research Analyst - Currencies & Commodities at Reliance Securities, noted that the range-bound movement continues in the rupee even after the weak dollar and crude oil prices.

“The dollar inflows into the system is also not a catalyst for the rupee to strengthen. The Indian equity market is experiencing a healthy dollar inflow. Moreover, India’s weightage has improved in the MSCI emerging markets index. Nonetheless, the RBI is maintaining a firm grip on the domestic currency,” said Trivedi.

According to Trivedi, the rupee is likely to remain range-bound. He sees 84 as stiff resistance and 83.80 as a floor.

“Only beyond this range can we derive a clear view,” Trivedi said.

Rupee Outlook

In the near term, the rupee is expected to trade within a narrow band of 83.80 to 84.05, while the medium-term outlook slightly broadens the range to 83.70 to 84.05, according to Pabari.

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