The Indian rupee clawed back from its worst-ever levels in early Friday trading, strengthening 0.3% to settle at 89.7250against the US dollar by mid-morning, as currency traders adopted a wait-and-see approach ahead of the Reserve Bank of India’s monetary policy announcement.
The modest recovery came after the currency plunged to an all-time low of 90.42 during Thursday’s session, marking the first time in history that the rupee had breached the psychologically significant 90-per-dollar threshold. Market participants attributed Friday’s stabilization to a combination of dollar selling by foreign and state-run banks, along with traders likely unwinding bearish bets against the currency.
The central bank’s policy decision is being closely watched against a backdrop of conflicting economic signals. The RBI kept the repo rate at 6.5%, maintaining its stance for the 11th consecutive time, though market expectations had been divided. While most economists had anticipated a rate cut to stimulate growth, the central bank also slashed the Cash Reserve Ratio by 50 basis points to 4% to ease liquidity pressures in the banking system.
The uncertainty stems from India’s recent economic data, which has painted a mixed picture. On one hand, the RBI revised its GDP growth forecast for FY25 from 7.2% to 6.6%, acknowledging domestic and global economic headwinds. On the other, the economy has shown resilience with stronger-than-anticipated growth figures that initially reduced expectations for monetary easing.
Currency advisory firm Finrex Treasury Advisors struck a cautious note despite the rupee’s Friday bounce. The firm does not anticipate a near-term reversal in the rupee’s downward trajectory and is advising exporters to sell dollars at current levels while recommending importers take advantage of any dollar dips.
According to a state-run bank trader, Friday’s rupee strength was supported by anticipated portfolio inflows and traders’ reluctance to take aggressive positions against the currency before the RBI’s policy statement. Beyond the rate decision itself, market participants are keenly awaiting Governor Shaktikanta Das’s commentary on the rupee’s recent slide and any measures the central bank might announce to support banking system liquidity.
The policy outcome is expected to have ripple effects beyond the spot currency market. Dollar-rupee forward premiums have surged in recent sessions, with the one-year implied yield climbing 29 basis points this week to 2.50%, while the one-month forward premium has risen from 16.5 paisa at the end of last week to 22 paisa.
The broader context for the rupee’s weakness includes sustained dollar strength globally and concerns about capital outflows. According to a Union Bank study, the RBI has been using its foreign reserves, resulting in a significant decline from USD 705 billion to USD 656.58 billion as of November 22, 2024, as the central bank intervenes to manage currency volatility.
In other market developments, India’s 10-year sovereign bond yield edged slightly lower to 6.5181%, while the benchmark Nifty 50 index remained largely unchanged on the day, reflecting investor caution ahead of the central bank’s announcement.
The rupee’s trajectory remains a critical concern for policymakers as a weaker currency complicates the inflation outlook by making imports more expensive, particularly for a country heavily dependent on imported crude oil. How the RBI balances its dual mandate of supporting growth while managing inflation and currency stability will likely determine market direction in the sessions ahead.
WHAT YOU SHOULD KNOW
The Indian rupee recovered modestly to 89.72 per dollar on Friday after hitting a historic low of 90.42, but the reprieve may be temporary. The Reserve Bank of India held interest rates steady at 6.5% while cutting the Cash Reserve Ratio by 50 basis points to ease liquidity pressures.
Despite this bounce, currency experts warn against expecting a trend reversal—the rupee faces continued pressure from dollar strength and capital outflows, with the RBI burning through nearly $50 billion in foreign reserves to manage volatility.
The central bank’s challenge is stark: support slowing economic growth (now projected at 6.6% instead of 7.2%) while preventing the weak rupee from fueling inflation through costlier imports.
For businesses and investors, the message is clear—the rupee’s struggles are likely far from over.
