Explained: Why Rupee is missing market and crude oil cues

• The Dollar is strengthening in December adding to downward pressure on the Rupee.
• Festive-led consumption is the reason why it’s moving downward in spite of softening crude and buoyant markets.
• Rupee is expected to trade with a depreciation bias, but without any sharp falls.
• A depreciation rupee will support India’ ambitions to become an export-oriented economy.
  

Indian rupee has hit new lows of 83.4 against USD in early December, when domestic markets were scaling new highs and crude prices coming down. It has recovered little since then, and economists say that it will keep trading with a depreciation bias in the near-term without central bank’s intervention.

Unlike in November, the Dollar has also started strengthening in December, which is an added downward pressure on the Rupee.

“Even as FPI flows continue and crude prices remain in check the US Dollar has remained firm ahead of the Federal Open Market Committee (FOMC) and general buildup of uncertainties,” Upasna Bhardwaj, chief economist at Kotak Mahindra Bank tells Business Insider India.

The November trouble

It however needs to be mentioned that the Rupee barely moved up even in November, when the dollar index was weakening. But in November, FII were selling their equities in the stock market, as they did in September and October. But now, they reversed their trend. In December until now, FIIs pumped in as much as ₹12,135 crore, but that too barely had any effect.

In addition, Brent crude is now trading at around $75 per barrel which should have given Rupee some respite. It has missed this cue too. Widening trade deficit due to festival-linked consumption might have been the culprit, surmises Bharadwaj.

“Rupee has been trending more with a depreciation bias with some volatility. Trade deficit for October 2023 reported at the highest led by imports (gold, oil and consumption) ahead of the festive season,” Anitha Rangan, economist at Equirus, told Business Insider India.

RBI on ‘wait and watch’ mode

India’s central bank is sitting on foreign exchange reserves to the tune of $604 billion as on December 1, 2023. Yet, it has not been selling dollars and intervening to rescue the rupee in November.

“RBI having spent sizable reserves in September-October, has not utilized its reserves to defend the rupee. Rupee has not appreciated while RBI reserves have grown in November,” comments Rangan.

However, between March and October of 2022, RBI spent $100 billion in reserves to defend the rupee. This time too, it’s expected to intervene. “We expect RBI to continue to intervene and manage the volatility in INR very closely. We thus do not expect any sharp depreciation in INR in the near term,” says Bharadwaj.

Rupee is expected to trade between 83-83.5/USD in the near term. Moreover, any new lows that it might hit will come gradually and will not be a sharp fall, expect economists.

Over the last one year, Rupee depreciated by around 2.5% with interim bouts of strength and weakness. And this trend might continue going into the new year.

“Let’s be mindful that the country is looking to strengthen its export franchise and taking advantage of global supply chain shifts and bolster its manufacturing capabilities. A depreciation rupee will be a support to exports, when global recovery arrives,” observes Rangan.

In the meanwhile, India’s relative growth attractiveness will continue to make a case for FPI and FDI flows.They will also provide the much-needed immunity from volatility.

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