INR vs USD: Rupee underperforms Asian peers against the sinking US dollar. Here’s why

Indian rupee appreciated against the US dollar on Monday, in line with the other Asian currencies. The rupee traded at 83.8475 to the dollar, up from 83.89 on Friday.

The dollar index - which measures the currency against a basket of six major peers, including the euro, sterling, yen and Swiss franc - languished at 100.69, just off the 13-month low of 100.60 reached at the end of last week.

The weakness in the dollar index comes after the US Federal Reserve Chair Jerome Powell’s recent speech at the Jackson Hole Symposium, wherein he said that the ‘time has come for policy to adjust’, signaling a potential interest rate cut in the September FOMC meeting.

Most Asian currencies have seen significant strength against the dollar recently, except for the Indian rupee, which has significantly underperformed.

On Monday, the dollar sank to a three-week trough against the yen. The greenback slumped as much 0.66% to 143.45 yen for the first time since August 5 before trading down 0.31%.

The Chinese yuan began the day by rising as much as 0.13% to 7.1069, the strongest level since August 5. It, however, ticked down slightly to 7.1202 per dollar in offshore trading, Reuters reported.

The Swissie rose about 0.1% to 0.8472 per dollar, and earlier touched 0.8457, the strongest level since August 5. The Australian dollar was not far from Friday’s peak of $0.67985, the highest level since July 11.

Moreover, the US currency hovered near its lowest in 13 months against the euro, and sagged closer to levels last seen in March 2022 versus sterling, Reuters reported.

However, Indian rupee has remained the worst performing Asian currency despite the broader weakness in the greenback. While its Asian peers have rallied to multi-month highs in anticipation of a US Fed rate cut, the rupee has depreciated this month against the American currency.

Why is Rupee underperforming?

The underperformance of rupee against the Asian peers can be attributed to the Reserve Bank of India’s (RBI) deliberate interventions, aimed at stabilizing the USDINR around the 83.90 - 83.95 range, analysts said.

“Despite a notable decline in the US dollar index, which typically supports the appreciation of emerging market currencies, the rupee has struggled to show significant upward momentum. This is attributed not only to the RBI’s interventions but also to strong dollar demand from importers and capital outflows from Indian equities, both of which have capped the rupee’s gains in recent sessions,” said Amit Pabari, Managing Director at CR Forex Advisors.

The foreign institutional investors (FII) have net pulled out more than ₹30,500 crore from Indian equities so far in August.

Another key factor pressurising the rupee is the appreciation of the Chinese Yuan.

“Since the start of the month, the Yuan has strengthened by over 1%, casting a shadow over the Indian rupee. Given India’s substantial trade deficit with China, any appreciation in the Yuan could drive up import costs, adding pressure on the rupee,” Pabari noted.

Additionally, widening of India’s trade deficit also weighed on the rupee. India’s trade deficit in July widened to the highest level in the last 9 months to $23.5 billion.

“Heavy FII selling in the month of August and concerns over the widening of India’s trade deficit pressurisied the local currency. Interventional by the RBI is likely to keep rupee in the range of 83.70 - 84.00 levels,” said Ajay Kedia, Director, Kedia Advisory.

Jigar Trivedi, Senior Research Analyst - Currencies & Commodities at Reliance Securities noted that the dollar index dropped by more than 3% in August and 0.62% year-to-date (YTD), yet the USDINR has not reacted inline with the dollar decline.

“Even amid a heightened geo-political risk in the Middle-east, the safe haven buying has failed to push the dollar higher. We are of the opinion that the RBI is cautious of extreme volatility and acts as per the situation demands on both the sides,” said Trivedi.

Rupee Outlook

According to Pabari, the rupee is expected to remain within a narrow range.

“In the near term, it is likely to trade between 83.75 and 84.00, with a slightly broader range of 83.60 to 84.00 anticipated in the medium term. While strong fundamentals suggest a stronger rupee, the central bank’s increasing interventions may cap further appreciation,” Pabari said.

Jigar Trivedi believes for now, 84.20 is a cap for USDINR, while 83.70 - 83.50 levels will act as a floor on the downside.

(With inputs from Reuters)

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