Rupee Weakens to 91.7 Against Dollar Amid Domestic Pressures, Says Barclays Expert
Barclays' Mitul Kotecha attributes the Indian rupee's decline to 91.7 against the dollar to domestic pressures including over $3.4 billion in FPI outflows during January, importer dollar demand, and NDF maturities. He identifies 92 as a crucial psychological level while noting that India's balance of payments remains stable and the RBI has multiple intervention tools available.
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The Indian rupee has experienced a sharp decline to 91.7 against the US dollar, driven primarily by domestic pressures rather than broader emerging market weakness, according to Barclays' senior currency strategist. Mitul Kotecha, Head of Forex & EM Macro Strategy for Asia at Barclays, characterized the rupee's movement as "idiosyncratic" and attributed it to a surge in pent-up demand for the greenback that "really just forced Dollar-INR much sharply higher."
Key Drivers Behind Rupee Weakness
Several factors have contributed to the rupee's recent decline, with foreign portfolio investor outflows being a primary concern:
| Pressure Factor | Details |
|---|---|
| FPI Equity Outflows | Over $3.40 billion in January |
| Current Exchange Rate | 91.70 per dollar |
| Psychological Level | 92.00 per dollar |
| Key Watch Level | 91.80 per dollar |
The currency has faced multiple headwinds including heavy and persistent equity outflows from foreign portfolio investors, continued dollar demand from importers, and the maturity of non-deliverable forwards. While bond inflows have provided some support, they have proven insufficient to offset the selling pressure from equity markets.
Market Dynamics and Momentum Effects
Kotecha highlighted the role of momentum-driven investors in amplifying the rupee's decline. He suggested that commodity trading advisors may have contributed to long Dollar-INR positions, creating additional downward pressure on the Indian currency. This momentum effect has been compounded by the breach of technical levels, which can trigger accelerated moves in currency markets.
Critical Levels and Market Psychology
While 91.80 against the dollar is being closely monitored by market participants, Kotecha emphasized that 92.00 represents a more significant psychological barrier. "The reality is psychologically 92 is a big level," he noted, explaining that breaches of such levels can trigger sharp and accelerated moves, similar to what occurred when the pair crossed 91.00.
RBI's Policy Arsenal
Despite the current pressures, Kotecha stressed that the situation does not constitute a crisis. India's balance of payments remains in "reasonable shape," and the pressures are "much more controllable" than in previous episodes. The Reserve Bank of India possesses a comprehensive toolkit to manage currency volatility:
- Moral suasion and regulatory actions
- Raising external commercial borrowing limits
- Direct intervention in spot markets
- Forward market operations
- NDF market intervention using substantial foreign exchange reserves
Outlook and Global Factors
The currency strategist noted that easing global market nervousness, particularly following news of no new US tariffs on Europe, could provide near-term support to Asian currencies including the rupee. However, he cautioned that the broader direction of the US dollar, which has begun to rebound, will remain the primary driver of the rupee's trajectory in the coming period.
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