Rupee weakened past the 95 mark against the US dollar for the first time on Monday, hitting a record low despite recent steps taken by the Reserve Bank of India (RBI) to curb volatility.
The currency fell to 95.20 per dollar, down 0.3% during the day, as pressure continued to build from global factors and sustained foreign outflows.
The RBI’s move to tighten limits on banks’ foreign exchange positions offered only brief support to the rupee, with analysts saying that underlying factors remain unfavourable for the currency.
Late on Friday, the RBI directed banks to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day. Banks have been asked to comply with this rule by April 10.
The move is aimed at reducing speculative positions and limiting volatility in the currency market.
Following the directive, banks are expected to sell dollars in the domestic market as they unwind existing arbitrage trades.
These trades involved buying dollars in the onshore market and selling them in the non-deliverable forward (NDF) market to take advantage of price differences between the two segments.
The spread between the onshore and NDF markets had widened sharply in recent weeks due to rising volatility, driven by risk aversion and higher oil prices linked to the Iran war.
The size of these arbitrage positions is estimated to be between $25 billion and $50 billion.
Despite the RBI’s intervention, pressure on the rupee remains strong.
The currency has been hit by persistent foreign portfolio outflows and rising concerns over India’s economic outlook as oil prices remain elevated.
Higher crude oil prices increase India’s import bill and widen the current account deficit, which puts pressure on the rupee.
At the same time, global uncertainty due to geopolitical tensions has reduced risk appetite among investors, leading to further outflows from emerging markets like India.
The weakness in the rupee comes alongside a sharp fall in equity markets. The Nifty 50 was down around 2% on Monday and is on track for its worst monthly decline since March 2020.
The combined impact of a falling currency, rising oil prices, and global uncertainty has kept overall market sentiment weak.
The rupee has declined more than 4% so far in March, putting it on course for its worst monthly performance in over seven years.
Analysts say that unless there is a clear easing in oil prices or a reversal in foreign fund flows, the pressure on the rupee is likely to continue in the near term.
