The Indian rupee is facing mounting depreciation pressure and could breach the psychological 92.25 mark in the coming week, according to market experts. Anindya Banerjee, Senior VP and Head of Commodity Research at Kotak Securities, highlighted that the currency has emerged as one of the weakest performers globally, ranking second only to the Turkish lira in terms of decline.

Key Drivers Behind Rupee Weakness

Multiple factors are contributing to the rupee's sustained decline, creating a challenging environment for the currency. Relentless foreign portfolio investor (FPI) outflows continue to weigh heavily on the rupee, while growing concerns about the unwinding of the yen carry trade add another layer of pressure. The rising Japanese bond yields have sparked concerns among market participants, further dampening sentiment toward emerging market currencies including the rupee.

Trade tensions between the United States and India are also contributing to the currency's weakness, with the rupee becoming a strategic tool in this environment. The combination of these factors has created a perfect storm for the Indian currency.

Short-term Outlook and Price Projections

Banerjee's analysis suggests significant near-term challenges for the rupee:

The expert noted that while the rupee could slide toward these levels, the upcoming Union Budget could serve as a potential positive trigger that might help stabilize the currency. This suggests that policy announcements and fiscal measures could play a crucial role in determining the currency's trajectory.

RBI Intervention Strategy

The Reserve Bank of India's approach to managing the currency situation remains measured and strategic. While the central bank continues its daily intervention in foreign exchange markets to manage volatility, Banerjee emphasized that the RBI's strategy focuses on managing the pace of decline rather than defending any specific level.

Given the ongoing trade tensions and subdued domestic inflation environment, the RBI appears to be allowing market forces to play out while waiting for sentiment to shift. The central bank's intervention strategy seems designed to smooth volatility rather than prevent depreciation entirely, particularly with the budget announcement potentially providing a sentiment shift.

Market Implications and Business Impact

The rupee's weakness reflects broader challenges facing the Indian economy, including persistent FPI outflows and external trade tensions. Market participants are closely watching the Union Budget for policy measures that could restore investor confidence and provide support to the currency.

For businesses engaged in international trade, the depreciating rupee presents a mixed scenario:

• Importers face higher costs due to increased foreign exchange requirements
• Exporters may gain competitiveness in global markets due to favorable exchange rates
• Currency hedging strategies become increasingly important for companies with significant foreign exchange exposure

The current volatile environment suggests that businesses with international operations need to carefully manage their foreign exchange risk through appropriate hedging mechanisms and strategic planning.

The Indian rupee experienced its steepest decline in two months, hitting an all-time low against the US dollar amid mounting global market pressures and the absence of central bank intervention. The currency's sharp fall reflects growing investor concerns over sustained foreign outflows and deteriorating market sentiment.

Record Low and Market Performance

The rupee's performance on Wednesday marked a significant deterioration in India's currency markets:

The currency emerged as the worst-performing Asian currency for the day, highlighting the severity of the selling pressure. This decline represents the rupee's biggest single-session fall in two months, underscoring the intensity of current market stress.

Contributing Factors to the Decline

Several key factors amplified the rupee's weakness. The Reserve Bank of India notably stayed away from the foreign exchange market, failing to provide dollar supply that could have cushioned the fall, according to traders. This absence of intervention allowed market forces to drive the currency to new lows.

Global market conditions further pressured the rupee, with a worldwide bond rout and US geopolitical tensions, including threats regarding Greenland, keeping investors on edge. These developments contributed to broader risk aversion in emerging markets.

Foreign Investment Outflows

Foreign investment patterns continue to weigh heavily on the rupee's performance:

Indian equities dropped 0.30% on Wednesday, following their biggest decline in over eight months on Tuesday. The persistent outflows reflect sustained foreign investor pessimism toward Indian assets.

Market Outlook and Analyst Views

Currency analysts point to structural challenges that may persist. Kunal Sodhani, head of treasury at Shinhan Bank India, noted that "flows mainly drive the USD/INR pair, thus weakness may continue to persist with interim legs of intervention expected from RBI in case of excess volatility."

India Forex Advisors highlighted that the currency will remain sensitive to corporate demand dynamics and portfolio flows. The firm warned that escalating global risk aversion would likely reinforce outflows, increasing downside pressure on the rupee.

Ongoing Challenges

Several factors continue to challenge the rupee's stability. While India's current-account deficit remains manageable, the lack of capital inflows presents a significant hurdle, leaving the currency exposed to further weakness. Importers show greater inclination to hedge compared to exporters amid expectations of further depreciation.

Additionally, the absence of progress on a US trade deal has deprived the rupee of a potential inflow catalyst. The weakness in most Asian peer currencies this year adds another layer of pressure that was largely absent in 2024, creating a more challenging regional environment for the Indian currency.