The Indian rupee declined 21 paise to close at an all-time low of ₹88.36 against the US dollar, surpassing its previous record low. This significant depreciation occurred despite India's foreign exchange reserves increasing by $3.50 billion to $694.23 billion for the week ended August 29, recovering from the previous week's decline to $690.72 billion.

Factors Driving the Rupee's Decline

Several key factors have contributed to the rupee's weakness:

1. Foreign Fund Outflows: Sustained foreign fund outflows have been a major contributor to the rupee's depreciation.
2. Global Trade Tensions: Market analysts attributed the rupee's weakness partly to global trade tensions, impacting emerging market currencies.
3. Global Economic Uncertainty: The overall global economic climate continues to impact emerging market currencies, including the Indian rupee.

Forex Reserves Composition

Despite the overall increase in reserves, some components saw declines:

India maintains its position as the fourth-largest holder of foreign exchange reserves globally, after China, Japan and Switzerland, with reserves sufficient to cover nearly a year of imports.

Market Response and Implications

• The rupee's depreciation to record lows has several implications:

  • Importers may face increased costs, potentially leading to inflationary pressures.
  • Exporters could benefit from the weaker rupee, although the overall economic impact remains a concern.

• On the equity front, foreign institutional investors sold equities worth ₹106.34 crore.

Investors, economists, and policymakers are closely monitoring the situation, watching for developments in global trade relations, US monetary policy, and India's domestic economic indicators for cues on the rupee's future trajectory.

The Indian rupee showed marginal weakness against the US dollar in a volatile morning trading session, while the domestic stock market witnessed a significant upswing. This movement comes amid a complex interplay of global and local economic factors, including a new development involving Indian exporters.

Rupee Performance and Exporters' Request

The Indian currency opened weaker at ₹88.09 against the US dollar but experienced sharp fluctuations during early trading. After briefly strengthening to ₹87.85, it settled at ₹88.03, marking a decline of 0.01 from its previous close.

In a significant development, Indian exporters are lobbying the Reserve Bank of India (RBI) to allow temporary conversion of US business proceeds at ₹103 per dollar, representing a 15% depreciation from current levels near the record low of ₹88.33. The Engineering Export Promotion Council of India plans to present this request to RBI Governor Sanjay Malhotra at an upcoming meeting.

Factors Influencing Currency Movement

Several factors contributed to the rupee's performance:

1. Foreign Institutional Investor (FII) Outflows: Sustained selling by foreign investors continued to exert pressure on the rupee. FIIs sold equities worth ₹1,666.46 crore, impacting the currency's strength.

2. Stronger Dollar: The US Dollar Index, which measures the greenback against a basket of major currencies, rose by 0.07% to 98.21, making the dollar relatively more expensive.

3. Global Oil Prices: Brent crude, the global oil benchmark, fell by 0.49% to $67.27 per barrel. Lower oil prices typically benefit the rupee, as India is a major oil importer.

4. GST Rate Cuts: Recent reductions in Goods and Services Tax (GST) rates helped limit the rupee's losses, potentially by improving economic sentiment.

Impact of US Tariffs on Exporters

Exporters are facing approximately 30% losses in US-bound shipments due to Trump's 50% tariffs on Indian goods, the highest in Asia. The US is India's largest export market, with labor-intensive sectors like textiles and jewelry expected to be most affected. The rupee has weakened 2.8% this year, becoming Asia's worst performer.

In addition to the exchange rate request, exporters have also sought additional government support, including loan repayment moratoriums, lower interest rates, and wage support.

Stock Market Rally

In contrast to the currency's slight decline, Indian stock markets opened on a strongly positive note:

This rally in equities markets stands in stark contrast to the FII outflows, suggesting strong domestic investor participation.

Services Sector Boost

Adding to the positive economic indicators, India's services sector demonstrated remarkable growth:

• The HSBC India Services Purchasing Managers' Index (PMI) rose to 62.90 in August from 60.50 in July.
• This marks a 15-year high for the services sector, indicating robust expansion in this crucial segment of the economy.

Outlook

The contrasting movements in the currency and stock markets, coupled with strong services sector growth and exporters' concerns, paint a complex picture of the Indian economy. While FII outflows and a stronger dollar are putting pressure on the rupee, domestic factors such as GST rate cuts and booming services sector activity are providing some counterbalance.

However, currency experts and former RBI officials oppose using exchange rate depreciation as a policy tool, arguing it would hurt importers and foreign investor sentiment. They suggest alternative measures like interest rate subventions and government subsidies to support exporters.

Investors, economists, and policymakers will be closely watching how these various factors play out and their impact on both the currency and equity markets.