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Published: September 15, 2023
Updated: September 15, 2023

Indian Rupee Nears All-Time Low Amid Widening Trade Deficit

Introduction

In a significant development, the Indian rupee has edged perilously close to an all-time closing low against the US dollar. Despite the Reserve Bank of India's (RBI) efforts to bolster the currency through dollar sales, investors have reacted to disheartening trade deficit data, which exceeded market expectations. This article explores the factors behind the rupee's depreciation and its potential implications on the Indian economy.

Rupee's Decline

The Indian rupee concluded its trading session at 83.18 against the US dollar, a noticeable drop from the previous day's rate of 83.04 per dollar. This decline occurred despite a relatively stable trading range earlier in the day.

Trade Deficit Impact

The rupee's fall was triggered by the release of India's trade deficit data, which caught the market off guard. The momentum shift from 83.05 to 83.18 per dollar was partly due to a knee-jerk reaction following the revelation of the trade deficit. Notably, there was a substantial short position in non-deliverable forwards (NDF) at around 83.10 per dollar, and this triggered stop losses, leading to a rapid increase in the USD-INR exchange rate.

Key Resistance Zone

Market experts are closely watching a key resistance zone between 83.25-30, which may indicate the rupee's future trajectory. The dynamics within this range will be pivotal in determining whether the rupee can regain strength against the US dollar.

Liquidity Concerns

Another factor contributing to this situation is the liquidity in the banking system. The surplus liquidity dwindled to Rs 2,696 crore, raising concerns about a potential liquidity deficit. Market participants are wary that this deficit may exacerbate if the central bank does not initiate a variable repo rate (VRR) auction. The scheduled second tranche of incremental cash reserve ratio disbursement on September 23 may not suffice, leaving the liquidity situation uncertain.

Trade Deficit Figures

The trade deficit for August stood at $24.16 billion, surpassing market expectations of $21 billion. Foreign portfolio investors (FPIs) and oil companies have played a significant role in preventing the rupee from appreciating, despite consistent dollar sales by the RBI. With oil prices trending higher, FPIs have continued selling equities while buying dollars, exerting downward pressure on the rupee.

The Indian rupee's proximity to an all-time low against the US dollar is a consequence of the unexpected trade deficit data and concerns regarding liquidity in the banking system. Market participants are keenly observing key resistance levels and the RBI's actions in the coming days. The evolving situation will have implications for India's economy and its currency's stability.