Explainer: Why rupee hit record low against US dollar

The Indian rupee fell to an unprecedented low against the US dollar on Thursday, driven by anticipated outflows and robust demand from local importers. This marked a significant decline to 83.6650 against US dollar in the latter half of the trading session, before settling at 83.6425.
The rupee’s struggle is not isolated but part of a broader trend impacting emerging Asian currencies.A stronger dollar and a weaker Chinese yuan added pressure, with traders highlighting these factors as key contributors to the rupee's fall. Despite India’s strong economic growth, the rupee has remained around record lows, primarily due to equity outflows and corporate demand for dollars.
Why did the rupee hit a record low against the US dollar?
The rupee fell to its lowest level against the US dollar due to a combination of factors including anticipated outflows and strong dollar demand from local importers. A broadly stronger dollar, coupled with weakness in the Chinese yuan, exerted additional pressure on the Indian currency.
How have equity outflows impacted the rupee?
Foreigners have sold a net of $2.6 billion of local equities this year, which has contributed to the pressure on the rupee. Despite this, there have been significant dollar inflows into the debt markets, totaling $7.5 billion, ahead of India's inclusion in the JPMorgan Emerging Market bond index.
What role does the central bank play in managing the rupee's value?
The central bank has generally kept the rupee within a tight band, preventing sharp appreciation amid inflows and tempering depreciation during dollar outflows. However, on Thursday, this support was absent, allowing the currency to fall significantly.
Is the record low a cause for concern?
Sajal Gupta, executive director and head of forex and commodities at Nuvama Institutional, mentioned that the record low won't "be a matter of concern till it is holding above 83.80." Gupta also noted that any further depreciation is expected to be "quite gradual."
How does the rupee's weakness relate to other Asian currencies?
The rupee’s decline on Thursday was in line with other Asian currencies. For instance, the offshore Chinese yuan was down 0.1% at 7.28, its weakest level since November 2023. This trend was influenced by the broader strength of the US dollar and rising US bond yields.
What is driving the current strength of the US dollar?
The US dollar's strength on Thursday was primarily due to the Swiss National Bank's interest rate cut, highlighting the divergence in monetary policies among global central banks. David Forrester, a senior strategist at Credit Agricole CIB in Singapore, stated, “US dollar strength is dominating the market at the moment and that is what is driving the rupee to a record low.”
How does the rupee's performance compare within Asia?
Despite the recent record low, the rupee remains the best performing currency in Asia this year after the Hong Kong dollar. This is indicative of its relative resilience amidst regional currency fluctuations.
(With inputs from agencies)