The Indian rupee fell to its new all-time low against the US dollar today, closing at the ₹85.97 level, on account of heavy outflows from domestic equity markets, and a hawkish US Fed outlook, among other factors, experts say.

“The Indian rupee’s slide toward the 86 mark today reflects a mix of global and domestic challenges. A stronger US dollar is aided by the US Fed’s hawkish stance and solid economic data, spurring risk aversion among investors, leading to capital outflows from emerging markets like India,” said Amit Pabari, MD at CR Forex. So far in January, Pabari says, approximately $4.2 billion has exited Indian markets, while a sharp increase in crude oil prices has affected the current account, further weakening the rupee.

According to Kunal Sodhani, Vice President, Global Trading Centre, Shinhan Bank, the rupee is also losing steam due to US President-elect Donald Trump’s uncertain future trade policies. This has led to arbitrage opportunities in interims between onshore and offshore rupee markets, and has led to weakening of Asian currencies, particularly Chinese Yuan, he said.

RBI intervention

The domestic liquidity deficits, averaging around ₹87,985 crore in January, have constrained the Reserve Bank of India’s (RBI) ability to intervene aggressively, Pabari says. During such liquidity shortages, the RBI often moderates its dollar sales to prevent exacerbating the liquidity crunch.

“Despite these limitations, the RBI was observed intervening at the 86.00 level today,” Pabari says. Sodhani, meanwhile, says if the Asian currencies continue to depreciate, the RBI’s intervention may remain shallow and the regulator could let the rupee depreciate to maintain export competitiveness.

More pain ahead

According to analysts at Systematix Institutional Equities, rupee may further fall to 90-92 level over next 6-10 months.

“Overall, our global models and domestic framework cover critical assumptions about the global economy, interest rate parity, pricing power parity, growth differentials and the overvaluation backlog due to currency inflexibility. Considering all factors our estimates suggest that INR/USD can depreciate…to 90-92 in the coming 6-10 months…,” says Dhananjay Sinha, co-head of equities & head of research, strategy & economics at Systematix.