Rupee Faces Prolonged Weakness as Capital Flight Challenges RBI Defenses
BENGALURU – The Indian rupee is set to remain under significant pressure, likely lingering near historic lows for the next several months. According to a recent Reuters survey of currency strategists, a combination of aggressive foreign capital outflows and a turbulent global bond market continues to weigh heavily on the domestic currency, despite strenuous efforts by the Reserve Bank of India (RBI) to stabilize the exchange rate.
So far this year, the rupee has depreciated by approximately 7% against the U.S. dollar. This downward trajectory is fueled by a global bond market rout, which has pushed yields in the United States and other developed economies to multi-decade highs, drawing investment capital away from emerging markets like India.
Capital Outflows Despite Economic Growth
Even as official figures highlight India as the fastest-growing major economy in the world, the country is witnessing a persistent exodus of foreign capital. Foreign investors have divested nearly $29 billion from Indian equities throughout the year, drawn by the high interest rates offered by safe-haven assets such as U.S. Treasuries.
“When U.S. Treasuries, considered the safest asset globally, are yielding around 5.25%, it is unrealistic to expect significant foreign inflows into India,” noted Madhavankutty G, chief economist at Canara Bank.
According to the median forecast of 35 currency strategists, the rupee is expected to trade at roughly 96.10 per dollar in the next three months. By the end of March, that figure is projected to weaken further to 96.50. Looking ahead to the next year, experts anticipate the currency will reach a record low of 97.50 against the dollar.
The “100” Threshold and RBI Intervention
While the rupee is currently on a path that could theoretically see it reach the psychologically critical level of 100 per dollar within six months, market participants believe the RBI will continue to deploy its massive foreign exchange reserves to prevent such a breach.
The central bank has ramped up its defensive strategy significantly since June. As of September 25, India’s foreign exchange reserves sat at nearly $750 billion, supported by one-off, policy-induced dollar inflows. Furthermore, the RBI’s net forward dollar liabilities hit a record $200 billion in August, underscoring the intensity of the intervention required to anchor the currency.
Anil Bhansali, head of treasury at Finrex Treasury Advisors, suggested that without this consistent support, the rupee would have likely crossed the 100-per-dollar mark as early as June. While no surveyed strategist expects the currency to break the 100 barrier within the next twelve months, major institutions like BofA, UOB, and Barclays have pegged the rate at 99 by September 2027.
Policy Outlook
Analysts emphasize that the RBI’s current strategy focuses on maintaining an “orderly depreciation” rather than preventing decline entirely. Anitha Rangan, chief economist at RBL Bank, noted that while the central bank prefers a range-bound rupee, the absence of sustained capital inflows leaves the currency vulnerable.
To combat this, many market watchers look toward monetary policy adjustments. A separate poll indicates that the RBI is likely to implement 25-basis-point interest rate hikes in both October and December, moves that economists believe could provide much-needed support to the beleaguered rupee.
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