On Friday, the Indian rupee hit a historic low of 83.7250 against the U.S. dollar. This decline was fueled by a weak risk appetite, increased dollar demand from oil companies, and outflows from domestic equities. Additionally, the volatility of the Chinese yuan exacerbated the situation, raising concerns over carry trades between the two currencies.
On Friday, the Indian rupee fell to an all-time low against the U.S. dollar, driven by weak risk appetite and continuous dollar demand from oil companies and custodial banks.
According to traders and forex dealers, the Indian rupee is likely to weaken in the near term due to strong demand for the U.S. dollar from oil importers and the unwinding of positions in the USD/JPY pair. However, the Reserve Bank of India may intervene to prevent a significant depreciation, supported by its record-high foreign exchange reserves. Most traders anticipate the rupee will decline to 83.84 against the U.S. dollar by early August.
Forex traders report that importers have been aggressively buying the U.S. dollar to take advantage of the relatively lower crude oil prices over the past few weeks. The September contract for crude oil on the Intercontinental Exchange has dropped 7%, from $87.95 a barrel on July 5 to $81.71 a barrel on Wednesday. This price decline is driven by concerns of an economic slowdown in China.
Adding to the rupee's troubles, the Union Budget 2024–25 surprised the market with increases in both short-term and long-term capital gains taxes, leading to foreign fund outflows from domestic equities. The short-term capital gains tax was raised from 15% to 20%, and the long-term capital gains tax from 10% to 12.5%. Consequently, the benchmark NSE Nifty 50 and S&P BSE Sensex dropped by 0.30% and 0.48%, respectively, since July 23.
The central bank may absorb excess inflows from the foreign exchange market to prevent the Indian currency from appreciating against the dollar. This approach was evident when the bank purchased dollars following India's inclusion in the JP Morgan Emerging Market index, which resulted in higher inflows. As a result, India's foreign exchange reserves increased by $9.7 billion to reach a record high of $666.85 billion as of July 12, according to data released by the RBI's official website last Friday.
Market participants will closely monitor upcoming economic indicators, including the U.S. gross domestic product and the Personal Consumption Expenditure index, for new insights into the Federal Reserve’s monetary policy outlook.
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