US-India negotiations stall, Indian central bank's emergency "intervention" fails, rupee falls below the 90 mark

US-India negotiations stall, Indian central bank's emergency "intervention" fails, rupee falls below the 90 mark

As the prospects for key US-India trade negotiations remain uncertain, the Indian rupee is suffering a heavy blow. Market concerns over the trade deadlock have intensified capital outflow pressure, causing the rupee to break below the crucial psychological barrier of 90 against the US dollar, a historic drop which the Reserve Bank of India’s intervention has failed to reverse.

On Wednesday, December 3rd, the Indian rupee depreciated by 0.3% against the US dollar, hitting a historic low of 90.1575. Analysts say the stalled trade talks between India and the US have dampened market sentiment.

Previously, the market had already been testing the resolve of the Reserve Bank of India. According to an article from Wallstreetcn, the central bank intervened in the market on Tuesday (December 2nd), trying to defend the 90 level. However, expectations that the rupee will continue to weaken have spurred importers and speculators to accelerate dollar purchases, and this strong market force has rendered the RBI's efforts to support the rupee largely ineffective.

Under the dual pressure of steep US tariff barriers and strong domestic import demand, Indian exporters are feeling the squeeze, with the current account deficit widening significantly in the third quarter of this year. These negative factors together form the macro background for the rupee’s decline, and the market generally believes that unless the trade negotiations achieve substantive breakthroughs, the rupee’s outlook will remain bleak.

Uncertain Negotiation Prospects, Ongoing Trade Headwinds

The rupee’s exchange rate trend is closely tied to sentiment around India-US trade negotiations, which have been fraught with twists and turns this year and continue to haunt the market.

At the beginning of this year, the rupee weakened against the dollar, then saw a slight rebound in March and April. In early May, the rupee rose to 83.7538 per dollar. According to the Global Times, this period saw investors betting that India could be among the first countries to reach a tariff agreement with the United States. But in July, the situation reversed: the US announced plans to impose higher-than-expected tariffs on Indian goods and threatened “punishment” over India’s purchases of Russian energy and weapons. In September, there were reports that President Trump urged European countries to impose similar “punitive tariffs” on Indian exports.

Yesterday, according to media reports cited by Huanqiu.com, the Indian Ministry of Commerce revealed that the India-US framework trade agreement negotiations have entered the final stage. India is currently negotiating free trade agreements with dozens of other countries and regions.

Although India is currently negotiating with multiple economies, its agreement with the United States remains the clear focus of the market and its uncertainty continues to pressure both exports and the exchange rate.

Powerful Market Forces, Central Bank Intervention Under Pressure

Facing the persistent depreciation of the rupee, the Reserve Bank of India is under immense pressure. The behavior of market participants clearly reflects the current pessimistic expectations. Ritesh Bhansali, Deputy CEO at Mecklai Financial Services, noted, “Since the rupee is in a depreciation channel, exporters are unwilling to actively sell dollars, while importers’ demand for dollars remains high.”

This one-sided market expectation has made RBI intervention increasingly difficult. Kotak Securities Ltd. currency analyst Anindya Banerjee warned that the central bank needs to act more decisively to curb speculative pressure.

“If they allow the rupee to close above 90, we may see even more speculative bets, with the rupee possibly sliding towards 91.” He added that the rupee's recent decline “is hard to explain fundamentally,” suggesting that market sentiment has deviated from economic fundamentals. Currently, HDFC Securities forecasts that after breaking the 90 mark, the rupee may test 90.30 over the next few days.

Exchange Rate Volatility May Affect Monetary Policy

The rupee’s weak performance is introducing new variables into the Reserve Bank of India's monetary policy. Although official data released last Friday shows that India’s economic growth is at its fastest pace in six quarters, severe fluctuations in the exchange rate could prompt policymakers to hold rates steady in Friday’s decision.

Kunal Sodhani, Head of Treasury at Mumbai’s Shinhan Bank, says the ongoing weakness of the rupee may prompt RBI to keep interest rates unchanged.

Previously, stronger-than-expected GDP data had already weakened market expectations for a rate cut. Before the GDP data’s release, RBI Governor Sanjay Malhotra had suggested a possible rate cut due to record-low inflation rates. Now, defending exchange rate stability seems to be a more urgent task for the central bank, and strategists at Barclays Bank bluntly state that only a trade agreement with Washington could give the rupee a brief respite.

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