The Indian rupee has reached a historic low, touching 88.36 against the US dollar, as concerns over potential US tariffs weigh on growth prospects and portfolio flows. The week concluded with the rupee settling at 88.27, marking a significant depreciation for the Indian currency.

Bond Yields Decline Sharply

In a parallel development, Indian government bond yields experienced a substantial decline. The benchmark 10-year bond yield dropped by 13 basis points to 6.47%, recording the most significant weekly decrease in four months. This sharp fall in yields was primarily attributed to weak US jobs data, which has fueled expectations of a potential 50-basis-point rate cut by the Federal Reserve.

Goldman Sachs Revises Rupee Forecast

Responding to the currency's movement, Goldman Sachs has adjusted its USD/INR forecasts upward. The investment bank now projects the exchange rate at:

These projections indicate an expectation of continued pressure on the rupee in the near to medium term.

Government and RBI Response

Finance Minister Nirmala Sitharaman has moved to reassure markets, affirming that the government will meet its fiscal deficit target without altering the borrowing calendar. This statement aims to instill confidence in the face of the currency's depreciation.

Meanwhile, the Reserve Bank of India (RBI) has been actively intervening in the forex market, conducting dollar-selling operations to curb the rupee's losses. However, analysts anticipate that the central bank will exercise caution in deploying its foreign exchange reserves for currency support.

Market Implications

The combination of a weakening rupee and declining bond yields presents a complex scenario for investors and policymakers alike. While a weaker currency can potentially boost exports, it also raises concerns about imported inflation and its impact on the overall economy.

The market will be closely watching for any further interventions from the RBI and policy signals from the government as they navigate these challenging currency dynamics. Additionally, global factors, particularly US economic data and Federal Reserve decisions, will continue to play a crucial role in shaping the rupee's trajectory in the coming weeks.

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.