Rupee’s downturn: A result of persistent global risk aversion or just a false alarm?

By Amit Pabari

Amid the rise in global risk aversion, the Rupee experienced a wild swing from Rs 81.70 to Rs 82.70 within weeks’ time due to the increase. Well, sudden depreciation in the local currency would have kept markets wondering if it is temporary or not. Well before that, let’s understand what led to such an abrupt move out of the blue despite robust fundamentals.

What triggered Rupee’s fall?

Risk-off sentiment on the front foot: The initial knee-jerk came after the global stock markets came tumbling in reaction to Fitch Ratings’ downgrading the US sovereign credit rating from AAA to AA+, citing reasons like fiscal deterioration and growing debt burden. This caused uncertainty and put pressure on riskier assets. However, the impact was less severe compared to the S&P’s downgrade in August 2011, as back then, many financial contracts were written that collateral had to be “AAA” rated. Since then, most of these financial contracts have been rewritten to include “debt backed by the US Government” or with similar words which helped limit the damage and dodge the bullet. By stating that the debt was “backed by the US Government,” they sought to highlight the continued belief in the creditworthiness of the US government despite the downgrade. 

Rising US yield and strong recovery in USD: The benchmark US 10-year Treasury yield rose as high as nearly 4.20%, the highest since November and the dollar held firmly above the 102 mark. The upswing in the bond yields and Dollar was driven by a combination of factors. The Treasury said it would borrow $1 trillion through issuance of long-term debt this quarter, to fill the growing gap between tax revenue and government spending.  Further, a better-than-expected jump in private-sector employment numbers from ADP and encouraging data from JOLTs job opening contributed to the surge.

Oil importer’s Dollar demand: A nearly 20% surge in oil prices to a three-month high, from $71 to $85 per barrel presents challenges for Indian importers and the economy due to a widened trade deficit. This escalates the demand for dollars and consequently exerts pressure on the Rupee.

Silent FPIs: In the wake of fears surrounding and pressure on global stocks, the impact is seen on the domestic equity as well and the Foreign Portfolio Investors (FPIs) too largely remained inactive in August after having a successful streak for the past 4 months, pumping in about $21.74 billion from March to July in the Indian capital markets.

RBI’s Absence: Last week, despite the Reserve Bank of India’s (RBI) intervention in buying dollars near Rs 81.65-70 levels and selling around Rs 82.30 levels — the rupee’s depreciation did not reverse. Furthermore, during a recent 50-paise fall across just three trading sessions, RBI was notably absent, allowing the rupee to align with other currencies.

Though the above-mentioned factors have dragged the rupee toward the upside of the range, is there a scope higher?

The factor which could limit the upside in the USDINR 

  • Strong Macro data: India’s economic data continued to remain resilient. PMIs of manufacturing and Services continued to remain above 55 levels for the past couple, which shows strong expansion. India’s other economic indicators like industrial production, and narrowing current account deficit continued favorable which could attract more foreign investments.
  • Positive FII flows: India has received over $5 billion of inflows for the last 3 months, as foreign investors continued to invest in India. In the recent past post IMF revising India’s GDP forecast for 2023-24, Morgan Stanley and S&P Global have voiced their optimism about the economy’s future and that it would best EM market to invest in. This could eventually keep the FII’s positive and could resume the flows. 
  • Falling Trade deficit and CAD: India’s trade deficit continued to narrow down further month on month basis, which is indeed a respite for the local currency. Higher foreign remittances and robust services exports further helped the current account deficit shrink at a faster pace, which is likely to support the local currency. 

 Considering the factors above the current downturn could be temporary, especially given that India’s macroeconomic data is more robust and stronger compared to other EM countries.

The technical chart indicates that USDINR is forming a symmetrical triangle pattern. However, it faces significant resistance in the Rs 82.80-83.00 zone, a level that has repelled price movements multiple times. Consequently, USDINR is expected to trade within a narrow range of Rs 81.70-83.00 and move back towards Rs 82.00-82.20 in the sessions to come. 


In a nutshell, currently, the negatives are outweighing the positives for the Rupee due to which it is trading near the weaker zone of the range. However, considering the US Fed’s not so hawkish tone due to falling inflation the current demand seems merely due to global risk aversion and won’t sustain for a longer period. On the other hand, India’s economic data remained stronger, which could arrest the depreciation in the local pair. With that, the chance of the Rupee breaching its all-time low of Rs 83.00-83.25 is relatively minimal, and as assured by RBI they have adequate buffers to manage the erratic moves. Hence, we expect that the USD INR will trade within the range of Rs 81.70-83.00 in the near to medium term.

Amit Pabari is Managing Director at CR Forex Advisors. The views expressed in this article is his personal views.