India's foreign exchange reserves experienced a significant decline, dropping by $6.9 billion to $695.36 billion for the week ended October 24, according to data released by the Reserve Bank of India (RBI). This decrease follows a $4.50 billion increase in the previous week when reserves had reached $702.28 billion.

Breakdown of Forex Reserves

Despite the significant drop in forex reserves, the Indian rupee demonstrated resilience, closing at 88.77 against the US dollar, narrowly avoiding its record low of 88.80 set in late September. The currency remained relatively stable, supported by intermittent dollar sales from state-run banks.

Monthly Performance

The rupee's performance for the month remained flat, showcasing a tale of two halves:

• Early Month: Rallied to 87.63 following central bank intervention
• Later Half: Lost earlier gains, ending the month unchanged

Equity Markets Shine

In contrast to the currency's flat performance, Indian equity markets posted impressive gains for October:

This marks the best monthly performance for both indices since March, highlighting the divergence between currency and equity market trends.

Factors Influencing the Rupee

Several factors are currently at play in the currency market:

1. Central Bank Intervention: The Reserve Bank of India is expected to continue managing rupee volatility.
2. US-India Trade Deal: Uncertainty over the progress of the trade deal is exerting depreciation pressure on the rupee. However, a senior government official has indicated that a trade pact is 'very near.'
3. Dollar Strength: The dollar index reached 99.54, posting a 1.80% gain for the month.
4. Short-term Outlook: The rupee declined 1.00% for the week, suggesting ongoing pressure.
5. Potential Support: Traders are monitoring upcoming IPO-related portfolio flows that could provide modest support for the rupee.

Market Implications

The contrasting performance between the currency and equity markets presents an interesting dynamic for investors. While the rupee faces challenges, the strong showing in the stock market indicates positive sentiment in the Indian economy.

As global economic factors continue to influence both currency and equity markets, investors should keep a close eye on developments in US-India trade relations and central bank policies, which could significantly impact market trends in the coming months.

Federal Reserve Chair Jerome Powell's recent comments about US inflation staying above target levels and labor market uncertainties have reduced expectations for December rate cuts, which may continue to influence global currency markets, including the Indian rupee.

The Indian rupee fell to a two-week low, closing at 88.6950 against the U.S. dollar with a 0.6% decline. The currency touched 88.7375 during the session as outflows intensified following Federal Reserve Chair Jerome Powell's hawkish policy signals. Powell indicated that October's rate cut may be the last for 2025, causing the dollar and U.S. Treasury yields to rise.

Rupee's Performance

The Indian currency opened weaker at 88.41 against the US dollar, marking a significant decline from its previous close. Here's a breakdown of the rupee's movement:

Factors Influencing the Rupee

Several factors contributed to the rupee's weakness:

1. Fed Chair's Comments: Jerome Powell's remarks suggesting that a December rate cut is not assured strengthened the US dollar.

2. US Treasury Yields:

   • 10-year yield: Rose by 8 basis points
   • 2-year yield: Increased to 3.60% after rising 9 basis points

3. Dollar Index: Remained steady after jumping 0.4% previously, regaining the 99 mark

4. Rate Cut Probability: Money markets are pricing a 68% chance of a 25 basis point rate cut in December.

Market Dynamics

The rupee faced additional pressure from:

• Firm US yields
• Persistent dollar demand from importers

India's central bank reportedly intervened through state-run banks to limit losses, though the intervention was not aggressive. Stop losses were triggered in the 88.40-88.50 zone, pushing USD/INR to fresh highs.

Regional Currency Performance

Asian currencies broadly declined 0.1% to 0.5%, reflecting the impact of the Fed's stance on emerging markets.

International Developments

President Trump announced plans to lower U.S. tariffs on China to 47% from 57% following a meeting with President Xi Jinping in South Korea. This development could potentially impact global trade dynamics and currency markets.

Implications for Investors

The rupee's depreciation may have several implications:

• Potentially higher import costs for businesses
• Possible boost for export-oriented sectors
• Increased volatility in the forex market

Investors and businesses engaged in international trade may need to reassess their currency hedging strategies in light of these developments.

As global economic conditions remain fluid, market participants should stay alert to further comments from central banks and key economic indicators that could influence currency movements in the near term.