2 hours ago
The rupee depreciated against the US dollar on Wednesday to emerge as the weakest currency among its Asian peers as the Reserve Bank of India's (RBI) monetary policy outcome did little to boost sentiment, said dealers.
With the 25-basis-point increase already priced in and the policy statement offering no additional guidance, the rupee’s movement was driven by external pressures and weak underlying dollar inflows.
The local currency settled at its second-weakest close of 96.78 per dollar, the lowest since May 20 of the current year, against the previous close of 96.43 per dollar. During the day, the rupee fell to as low as 96.86 per dollar.
“The market was tracking crude and sentiment has been down because of outflows. The hike was priced in, but the market was hoping for some guidance from the RBI,” said a dealer at a state-owned bank.
At the post-policy press conference, RBI Governor Sanjay Malhotra said markets can be irrational in the short run but eventually find the right value. He said several estimates, including real effective exchange rate (REER) measures, suggest the rupee is not overvalued and may in fact be undervalued.
He added that the central bank would support an orderly movement in the currency and keep volatility in check, without targeting a specific level.
“Markets can be quite irrational in the short run…It’s only in the long run they are able to find the right level,” said Malhotra. “By a number of estimates including the REER, the rupee is not overvalued; it may be undervalued,” he added.
As of August, the real effective exchange rate (REER) of the Indian rupee stood at 88.92, against 88.69 in July. The REER adjusts the nominal effective exchange rate (NEER) to account for inflation differentials between India and its major trading partners. A REER value above 100 indicates an appreciation of the rupee relative to the base year.
The rupee has depreciated by 2.03 per cent in the current financial year, whereas it has weakened by 5.99 per cent since the onset of the US-Iran conflict.
“Implicit in this is our belief that interest rate hikes are not being prioritised to shore up the rupee. Instead, they are being used for lowering inflation (which in turn, may have a positive impact on the rupee). We do believe that other steps to attract inflows, such as FDI and tax incentives, may come in play if pressure on the currency continues,” said HSBC in a report.
Meanwhile, dollar-rupee forward premiums rose sharply as traders braced for more sell/buy foreign exchange swaps by the central bank after it announced no fresh liquidity-withdrawal measures in its policy. The implied one-year dollar-rupee forward premium climbed 20 basis points to 3.66 per cent, its highest in six months, after jumping 14 basis points on Tuesday on likely sell/buy swaps by the RBI.
In his monetary policy statement, Malhotra said India’s current account deficit (CAD) remained modest and well below sustainable levels in Q1FY27 despite external shocks. He said that going forward, moderation in global trade growth, elevated energy prices and persistent trade policy uncertainties pose upside risks to India’s CAD in 2026–27.
At the same time, buoyant services exports, robust remittances and the implementation of the India-UK trade deal and other bilateral agreements are expected to provide resilience to the external sector.
India’s CAD stood at 0.5 per cent of GDP, or $4.2 billion, in Q1FY27, compared with 0.4 per cent of GDP a year ago. The services trade surplus stood at $85.8 billion during April–August, while net transfers, primarily comprising worker remittances, stood at $53.9 billion during April–July.
Malhotra said the balance of payments was expected to record a healthy surplus in 2026–27, while foreign exchange reserves remained adequate, with import cover of around 11 months.
