India’s central bank is allowing the rupee to weaken as deteriorating external conditions strain the currency, according to Reuters sources familiar with the Reserve Bank of India’s thinking.
A key takeaway from the Reuters reports is:
- “It doesn’t make sense to spend reserves when fundamentally everything is against the currency,” one of the sources said,
The rupee has plunged in recent sessions and is Asia's worst performer this year, down 5.5% year-to-date.
- Sources said the RBI is no longer defending any particular level
- RBI will instead focus on preventing disorderly moves or speculative attacks
- shift reflects weaker dollar inflows: foreign investors have sold $17bn in Indian equities this year, while FDI, trade receipts and offshore fundraising have slowed
- Also, India-US trade uncertainty, elevated crude and persistent FII outflows key near-term pressures.
Rupee weakness has weighed on foreign-currency denominated equity returns even as MSCI India is up 7% this year.
The rupee briefly rebounded to ₹89.89 on Thursday (see chart pic):
- reports of RBI intervention
- softer US dollar
Markets now await Friday’s RBI policy announcement amid strong growth, easing inflation and geopolitical risks.
