Rupee falls to a record low, Reserve Bank of India intervenes to defend the 90 level.

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Under the dual pressures of weak overseas capital flows and a widening trade deficit, the Indian rupee fell to a record low against the US dollar, prompting the Reserve Bank of India (RBI) to intervene in order to defend the key psychological level of 90.

On Tuesday, the Indian rupee depreciated 0.28% to 89.7975 against the US dollar, setting a new record low after Monday’s 89.7575. During intraday trading, the rupee once dropped to 89.85. As it neared the 90-mark, Reuters reported the RBI stepped in to prevent further depreciation.

This intervention by the Indian central bank highlights its determination to prevent disorderly depreciation of the rupee and maintain market stability. Analysts at MUFG Bank said in a report, "We expect the RBI to intervene actively to set an upper limit for the USD/INR exchange rate."

The rupee's weakness comes just as India reported strong economic growth data for the quarter ended September and inflation remained low. However, these positives, which would typically support the currency, have been temporarily sidelined by investors, who are presently more focused on unfavorable capital flow dynamics and the widening trade deficit affecting the rupee.

Multiple Headwinds Erode Fundamental Advantages

Currently, investor concerns over the rupee’s outlook mainly stem from persistent capital flow pressures. Both portfolio and direct investment inflows remain weak, while India's trade deficit continues to widen. Economists say the ever-expanding trade deficit is expected to drive the current account deficit wider this fiscal year. HSBC predicts India’s current account deficit will rise to 1.4% of GDP this fiscal year from 0.6% last year.

Data shows that since the beginning of the year, foreign investors have withdrawn nearly $17 billion from India’s stock market. In addition, the long-anticipated US-India trade agreement has yet to be reached, which is also weighing on the rupee's prospects. The market had expected such an agreement to serve as a catalyst for improving sentiment in the rupee market, but the reality is just the opposite.

Market Expectations and Behavior Exacerbate Depreciation Pressure

Market participants’ actions further amplify the downward pressure on the rupee. According to bankers, importers are accelerating hedging operations and buying US dollars in advance due to expectations of further rupee weakening, which intensifies the market’s supply-demand imbalance.

Meanwhile, exporters have generally slowed down their hedging, preferring to delay converting foreign exchange earnings into rupees in hopes of obtaining a better exchange rate in the future. These one-way market expectations and behaviors together form a strong force driving rupee depreciation.

The Indian Central Bank Aims to Stabilize, But Long-Term Depreciation Trend is Hard to Reverse

To slow the rupee's decline, the RBI has consistently maintained an intervention stance in the foreign exchange market. According to traders, over the past few weeks the central bank had been defending the key level of 88.80. However, after this level was breached, the pressure on the rupee gradually accumulated, eventually bringing it close to the key psychological level of 90.

Although the RBI is trying to stabilize the exchange rate, some institutions believe that the long-term trend remains unoptimistic. According to MUFG Bank, underlying fundamentals suggest the rupee still has room for further weakening, which could mean that the RBI will eventually allow the rupee to fall below 90 over time. In the short term, the central bank’s intervention may continue to provide a buffer for the market, but reversing the overall trend remains a challenge.

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