What’s going on here?
The Indian rupee slumped to a record low against the US dollar on July 29, 2024, closing unchanged at 83.7275.
What does this mean?
Several factors conspired to push the rupee to its lowest point ever. Month-end corporate demand for dollars, coupled with outflows from local equities, played a significant role. Adding to the downward pressure were the volatile Chinese yuan and a general lack of risk appetite among investors. The Reserve Bank of India tried to stem the tide by selling dollars through state-run banks in a ‘passive’ intervention, allowing for gradual rupee depreciation. Despite the RBI’s efforts, the dollar index edged up to 104.5, even as most Asian currencies gained between 0.1% and 0.8%. In financial terms, dollar-rupee forward premiums increased, with the 1-year implied yield rising to 1.83%, its highest since February. As a point of comparison, the 1-year US Treasury yield remained steady at 4.81%.
Why should I care?
For markets: Corporate demands and weaker sentiment.
The rupee’s plunge highlights the vulnerabilities in emerging markets, exacerbated by corporate dollar demands and fragile investor sentiment. With the dollar index slightly up, it signals that inflows into dollar assets could continue. However, the impending policy decisions from the US Federal Reserve, the Bank of England, and the Bank of Japan could shift market dynamics. Investors eagerly await Fed Chair Jerome Powell’s remarks, which could offer clues on monetary policy directions.
The bigger picture: Global currency shifts at stake.
While the rupee struggles, ING Bank anticipates a bearish outlook for the dollar index, potentially dipping below 104.0 this week. This forecast provides a glimmer of hope for currencies in emerging markets like India. However, the broader implications of this currency shift hinge on international monetary policies. As central banks like the BoE and BoJ prepare their strategies, their decisions will ripple through global markets, affecting everything from import costs to inflation rates.
